JLT Pension Capital Strategies (JLT PCS), which specialises in corporate consulting and pension scheme de-risking, has released its latest analysis of pension fund buyouts in 2012.
The firm says that pensioner buy-ins remain desirable due to their affordability, as pensioners are "cheaper" than deferred members. On top of that, those schemes feeling the strain of funding levels can potentially complete a buy-in with no additional funding unlike a buy-out.
Another reason for its increased popularity is that low gilt yields have led to schemes with the right investment profile being able to exchange their gilt holdings for a pensioner buy-in contract with little or no additional cost.
During the first quarter of this year £500m of buyout deals were transacted and insurers remain positive that there will be an increase in activity over the remainder of the year, with two large deals having been announced in Q2 2012 worth in excess of £150m.
"As insurers continue to offer flexibility in their terms, interest in de-risking solutions will remain high and more schemes of all sizes will approach the market over the remainder of 2012," says Martyn Phillips, director and head of buyout consulting at JLT Pension Capital Strategies.
The first ever buyout to include active members was also completed during this year's first three months. The deal involved two schemes sponsored by Denso, and JLT PCS were one of the advisors on this transaction. The transaction required the sponsoring employer to pay an annual premium to the insurer, in this case PIC, in respect of each year's accrual of benefits, to be calculated on a pre agreed formula linked to the number of active members over the year and their pensionable salaries, the firm says.
Impact of changes to the industry remain unclear
The analysis made by JLT also stresses that the cost implications of Solvency II continue to be unclear as the plans have been delayed until 2014. This means most insurers remain comfortable about their pricing.
The firm also says that CPI benefits are still not being priced efficiently and consistently by insurers, which it says is predominately due to the lack of issue of CPI-linked debt from the government. This means many buy-ins are being secured on a RPI basis, with flexibility to change to CPI when the time is right.
The past year has also seen three longevity only providers (UBS, Nomura and Credit Suisse) pull out of the market, each citing overly onerous capital and regulatory requirements. However, JLT says there is still significant competition in the market with a number of new re-insurers poised to offer quotations for a range of structures.
"It remains to be seen what effect the persistent sovereign market crisis in Europe will have on the bulk annuity market. The market has been buoyant during testing conditions, with a record number of deals being completed in 2011," Phillips commented.
"Market volatility means that it is extremely important for schemes to prepare in advance if they are serious about transacting. Even if current conditions may be seen as prohibitive, advance preparation will enable a scheme to transact swiftly once conditions allow.
First published 02.08.2012
azeevalkink@wilmington.co.uk
