Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

£20 billion of pension scheme risk transfer deals likely by end of 2012


Hymans Robertson has published its Managing Pension Scheme Risk Report Q4 2010. In the report which looks at the state of the pension scheme risk management and risk transfer market they suggest that significant growth is likely over the next couple of years and beyond.

Since the pension scheme risk transfer market took off in 2006/7 around £30 billion in deals has been struck. These deals are predominantly buy-ins, buy-outs and longevity swap transactions. 2010 saw around £8 billion in transactions and Hymans Robertson say we should expect more during 2011 as several multi-billion pound deals are expected to complete.

Risk transfer deals have become more affordable and banks and insurers are offering new innovative and flexible ways to structure these deals which is increasing interest among pension schemes and making access to the market much easier. Hymans Robertson says that we are entering an era where defined benefit pension scheme members will be increasingly relying on insurers and banks to provide their pensions. They expect one in four UK FTSE 100 companies to complete a material pension risk transfer deal by the end of 2012.

James Mullins, Head of Buy-out Solutions, at Hymans Robertson, comments:

“Our analysis illustrates that it won’t be long before £50billion of pension scheme risk has been transferred to insurance companies and banks. 2010 was the third successive year during which £8billion of pension scheme risks were transferred via buy-ins, buy-outs and longevity swap deals. 2011 is likely to see a substantial increase above these levels.”

“There are several multi-billion pound buy-ins and longevity swaps currently being tendered and expected to complete in the first half of 2011. Furthermore, many providers acknowledge that they are currently devoting serious resource to around 20 similar, projects for some of the UK’s largest pension schemes.”

“Based on the level of activity currently in the market, we expect one in four FTSE 100 companies to have completed a material pension scheme risk transfer deal by the end of 2012. This is due to a number of drivers. One is that market conditions have improved over the last year. Coupled with the change to the CPI inflation measure, this means that risk transfer deals are more affordable for many UK pension schemes.”

“Banks and insurers continue to offer new flexibility to make risk transfers accessible to all pension schemes. It is crucial that companies and trustees are aware of this flexibility and innovation to ensure that they do not miss excellent opportunities to reduce risk. In addition, schemes are increasingly keen to manage away as much risk as they can.”

“There is a snowball effect here: the more schemes that tackle risk, the more pressure there is on others to follow suit. The raft of final salary closures over the last two years, and the impending restrictions on tax relief for high earners’ pension contributions, are also increasing the demand from schemes to reduce risk.”

“We expect to see more of the UK’s largest companies completing risk transfer deals for their pension schemes during 2011 and beyond. It would be no surprise to see new records set in terms of the size of longevity swaps, buy-ins and ‘DIY buy-ins’ (i.e. where a pension scheme combines a longevity swap with an investment strategy that matches the cashflows that the pension scheme is required to pay to its pensioners each year).”

“Longevity is widely viewed as one of the biggest unmanaged risks schemes face. While we will undoubtedly see an upswing in companies offloading longevity risks, one of the obstacles to pricing longevity swaps is predicting life expectancy correctly. Companies and trustees need to understand their scheme’s particular longevity risks which are based on the unique characteristics of their membership. The work of our sister company, Club Vita, for example, should help ensure they can assess the potential value of a longevity swap correctly.”

So we are approaching a future where insurers and banks have taken on a large amount of longevity risk from pension schemes. Hymans Robertson’s report only focuses on the UK market and we are hearing talk of the market springing to life in other European countries soon. With all the longevity risk being transferred into the hands of insurers it is inevitable that some of them will seek to transfer those risks on to the capital markets in some format (potentially cat bond type longevity securitizations).

You can download the full report from Hymans Robertson here.

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