Pension scheme de-risking volume set to grow


The volume of deals completed to de-risk pension schemes of their longevity and other risks looks set to grow according to a report from Hymans Robertson. Their Managing Pension Scheme Risk Report for Q1 2011 looks back at the deals done in the past quarter and ahead to the prospects for Q2 and beyond.

The overall view is that the pipeline is growing and Hymans Robertson say that they expect to see UK£20 billion in pension risk transfer deals by the end of 2012. With just £30 billion in deals completed since 2006/7 that means some significant acceleration is likely to be seen in the rate that deals come to market over the coming months.

Hymans say that Q2 looks set to be a record quarter for the number of buy-in and buy-out deals likely to be completed. The pipeline of new risk transfer deals is currently at its highest since before the credit crisis and several multi billion pound deals are being marketed. That’s a good sign for the health of all financial markets but it is also a sign of the increased profile that longevity risk is receiving.

Hymans say that several longevity swap transactions have reached the exclusivity stage, meaning that they are likely to complete within the next six months. Longevity swaps have lost some favour to buy-in/out deals lately, but with efforts being taken to standardise swap structures and indices against which swaps can be structured, they are likely to increase in popularity again. Hymans Robertson predict a surge in longevity swaps in the next few months.

The year to 31st March 2011 saw UK£4.5 billion in risk transfer deals, mostly buy-ins. Hymans Robertson still expect one in four UK FTSE 100 companies to have completed a material risk transfer scheme of some sort for their pension scheme by the end of 2012.

James Mullins, Head of Buy-out Solutions, at Hymans Robertson, commented: “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 during 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.”

“Banks and insurers continue to offer new flexibility to make risk transfers accessible and more affordable 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.”

“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 market leading work of our sister company, Club Vita, for example, helps minimise “basis risk” inherent in any life expectancy assumption, and ensures pension schemes can assess the potential value of a longevity swap correctly – putting trustees and company sponsors on an equal footing with counterparties to these £multi-million transactions”

The press release from Hymans Robertson (which you can read here) and the full report (available here) contain some interesting data on deals done in the last quarter.

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