Sections

Two-thirds of buyout enquiries fail, none get best value says Aviva

Related images

  • Two-thirds of buyout enquiries fail, none get best value says Aviva

UK - As many as two-thirds of enquiries into insurance buyouts or buy-ins fail at some stage of the transaction process, according to Aviva.

Moreover, at the firm's recent Pensions Summit - an annual gathering of clients and consultants - head of defined benefit risk Nick Johnson noted that because of the volatility of pricing, which can move by as much as 4-5% in the course of six weeks, not one of the 200 deals Aviva has completed has been at the best price compared with the three weeks before or after the actual transaction date.

The buyout process runs into difficulties right from the start, said Johnson. Because different providers follow different protocols around missing data and other variables, the comparability of quotes is very questionable.

Getting quotes on the same day based on the same protocols from half a dozen providers can result in a process involving as many as seven rounds of quotes taking over a year, Johnson explained - leading to a high failure rate at this early stage.

"It's clearly not the quickest process, and at the end of it only one-third of schemes transact," he said.

But even when a provider is chosen, a build-up of unanticipated charges often leads to more charges, Johnson explained. A scheme that needs to realise the value of assets that are not suited to the buyout provider's portfolio may need to go to market for a month or more - and the buyout provider will charge for taking that market exposure risk.

Schemes that think their liabilities have shrunk, thanks to a shift from inflation indexation based on the retail prices index (RPI) to the consumer prices index (CPI), may be surprised to find that it costs them more to offload those liabilities because insurers will find it tough to buy CPI-linked assets, he noted, adding that more transactions fell through at this stage - and Solvency II is set to make the whole process still more expensive.

Johnson advised that the key to minimising the risk of your deal failing is to ensure, once the decision has been made to pursue buyout or buy-in as an end, that investment and contribution policies are set with buyout costs firmly in mind.

"If you are in assets that we price [from], those assets will move in-line with buyout costs, and you will also own assets that we can take on directly, removing the need for us to take market risk to transact," he said.

He also recommended investing in the best possible information on the drivers of buyout pricing in order to facilitate better decision-making around transaction value, as well as devising a timetable with defined trigger points around a pricing benchmark in partnership with the buyout provider.

Then it is all about being decisive: "We speak to a lot of trustees who had a deal lined-up in 2008, weren't sure whether it was the right time to de-risk, and now wish they'd taken that price," said Johnson. "A 'no regrets' mentality is key."

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2467

    Asset class: Search for a broker (mainly ETFs).
    Asset region: Global.
    Size: 250m.
    Closing date: 2018-08-28.

  • DS-2468

    Closing date: 2018-08-24.

Begin Your Search Here