Unique pensions buyout deal could spark interest, but costs remain high
UK - An unprecedented pensions buyout agreement in the UK - covering both accrued and accruing rights - could serve as an example for other companies, but the cost of such deals remain relatively high, experts have warned.
Last week, the DENSO Manufacturing UK Pension Scheme and the DENSO Marston Pension Scheme signed a buyout agreement with Pension Insurance Corporation (PIC).
The deal - which covers approximately £200m (€240m) of liabilities - represents the first contract to cover accrued pensions and allow members to continue accruing future final salary benefits through insurance policies.
Jay Shah, co-head of business origination at PIC, told IPE that some companies would follow the move made by DENSO as a means of keeping their pension schemes open to active members for HR purposes.
"However," said Shah, "since companies will still have to pay for the amount that reflects the additional accrued rights that members will benefit, some firms dealing with underfunded schemes might be reluctant to take on the cost of such a buyout deal, although there are other options, such as deferred premiums, to help bridge any gap."
David Ellis, head of longevity risk management at Mercer, agreed that affordability could be a sticking point.
"Other schemes may well follow this path if the scheme is currently open to future accrual and if the sponsoring employer has a strong desire to reduce pensions risk but allow members to continue accruing pensions," he said.
"However, affordability may be an issue, as with any bulk annuity transaction."
Ellis went on to say that a number of different options are currently available for pension schemes and employers to manage their pension obligations, and "the pros and cons of each option need to be carefully considered".
Under the buyout agreement signed by the two DENSO pension schemes, PIC will bear the longevity, financial and regulatory risk. The company will also cover administration, as well as the management of the assets.
While salary risk is removed for the pension scheme, it is not eliminated for the sponsoring employer. DENSO will, therefore, remain responsible for setting salary, as well as the length of contributions paid by employees.
As a result, PIC will provide a vehicle for future contributions from the sponsoring employer, on an annual basis, to cover the benefits accrued to active members each year.
Looking more widely at the risk transfer market this year, both Shah and Ellis said they expected the pace set in 2011 to continue.
According to Ellis, particular opportunities will arise for many schemes with a significant gilt holding wanting to insure pensioners only.
"Insurers are now more flexible and innovative than before in relation to deferral of premium payments, so schemes that cannot afford full buyout may still be able to lock into terms now and pay some of the premium later," he said.
However, Shah expects to see more buy-ins and buyouts in 2012 than longevity swaps, as those latter deals are mainly conducted by large pension plans with greater resources.
"A trigger point would be that a large portion of schemes have their tri-annual valuation coming up at the end of March," Shah said.
"I would then expect that most of those schemes would find that, given where interest rates and inflation expectations are now, their deficit would have gone up."
As a result, the push towards securing the pension scheme - especially when trustees demand higher contributions due to the higher deficit - will lead to an increase in buy-in and buyout activity, he said.