Q2 pension risk transfer deals up 400% to £1.4 billion

The market for transferring the risks associated with pension schemes, including transferring longevity risk, has continued to grow during the last quarter in the UK. Q2 became one of the busiest quarters for the pension risk transfer market since the credit crisis of 2008, resulting in £1.4 billion of risk transfer deals completed, comprising buy-ins, buy-outs and longevity swaps according the latest quarterly report from Hymans Robertson.

The figure of £1.4 billion is nearly 400% up on the figure for Q1 2011 and Hymans say that the pipeline for pension risk transfer deals is buoyant with new deals expected to come to market in the coming months. For the year to date, Hymans Robertson say that £3.6 billion of pension risk transfer deals had been completed in the twelve months to the 30th June 2011.

During Q2, five providers completed risk transfer transactions worth over £150m with one of the largest buy-ins utilising a new and innovative transaction structure featuring an escrow account designed to capture improved pricing for CPI inflation-linked liabilities if the CPI pricing market develops in the future. The largest transaction of the quarter was from Prudential who transferred £280m of risk for a client.

Hymans Robertson say that several potentially significant longevity swap transactions have reached the exclusivity stage and they fully expect some of these transactions to complete during the second half of this year.

New entrants to the market include Nomura and Friends Life who both signalled their intention to actively participate in pension risk transfer deals during Q2.

Patrick Bloomfield, Partner and Head of Trustee Solutions, at Hymans Robertson, said:

“The second quarter saw a buoyant return to activity in the pension risk transfer market after a quieter start to the year. The entry of new providers also indicates that banks and insurers believe the marketplace will continue to develop strongly.

“The level of activity highlights how several schemes have taken the opportunity to de-risk at what appears to have been an opportune time to do so. Market conditions were favourable throughout the quarter, but have turned dramatically in August’s market turmoil. For schemes that were already significantly de-risked or are looking at hedging longevity risk recent market events are unlikely to be a barrier to a deal. However, for less well hedged schemes trustees and sponsors should consider the full range of asset options, not just insurance solutions, to make sure they achieve the best balance of risk and reward for their scheme.”

Regarding the rest of the year, Patrick Bloomfield added:

“We are likely to see further strong activity across the remainder of the year, particularly with schemes pursuing longevity swaps, several of which are already in the pipeline. Schemes looking to pursue this route will need to ensure they have accurate data on their members’ life expectancy though, in order to ensure they receive a well-priced, suitable arrangement.

“Looking further ahead, we predict schemes will continue to look to de-risk, with one in four FTSE 100 companies completing a deal by the end of 2012. Banks and insurers continue to offer new flexibility to make risk transfers accessible and more affordable to all pension schemes. This will help fuel the market, and we may also see further use of ‘DIY buy-ins’. This involves a scheme combining a longevity swap with an investment strategy that matches the cashflows that the pension scheme is required to pay to its pensioners each year. Given August’s market events we may see the DIY approach being favoured by larger schemes for some time.”

You can read the full quarterly update from Hymans Robertson here.