During 2008 positive news was a rarity,
but there was some. One reason to be cheerful came from the UK’s
defined benefit (DB) pensions bulk annuity market.
Aon Consulting, a unit of insurance
broker and risk management service provider Aon, reported how the
total value of buyout and buy-in deals soared 193 percent to £8.2
billion ($11.9 billion) compared with 2007 figures.
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“During the year, most providers witnessed an
unprecedented level of interest from defined benefit pension
schemes and their sponsors,” said Paul Belok, principal and actuary
at Aon Consulting.
Beyond the bulk annuity market’s record new
business, 2008 will also be remembered as the year in which the
first £1 billion bulk annuity deal was concluded.
This honour went to UK insurer Prudential,
which in September clinched a bulk annuity buy-in agreement with
the Cable & Wireless Superannuation Fund whereby it assumed
responsibility for benefits payable to some 5,000 pensioners.
Though the deal helped Prudential regain its
long-held position as a top player in the UK buyout market, top
position went to UK insurer Legal & General (L&G), another
of the market’s pioneers.
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By GlobalDataDuring 2008, L&G executed fewer deals –
173 compared with 183 in 2007 – but a higher average value per deal
boosted total value of new business almost two-thirds to £1.82
billion.
In regaining its leadership position, L&G
ousted buyout specialist insurer Paternoster which saw the number
of deals slip from 16 to 13 and their value by 23 percent to £1.39
billion.
Paternoster had to be content with fourth
position in 2008, with newcomer Pension Insurance Corporation (PIC)
roaring into second position with five deals valued at a total of
£1.65 billion. PIC’s biggest deal came in December when it secured
the largest ever UK pension insurance buyout. This involved
settlement of £1.1bn of pension liabilities and the securing of
benefits for over 15,000 scheme members of the Thorn Pension Fund
(TPP).
Big growth driver
Prior to its entry into the bulk annuity
market, PIC’s parent company Pensions Corporation had focused on
non-insurance based defined benefit (DB) pension fund buyouts. In
essence, this involved acquiring a company in its entirety
specifically to gain access to its DB pension fund’s assets, an
approach that soon found itself in disfavour with The Pensions
Regulator.
Full buyouts, such as that involving
TPP, were not the major source of business in the market in 2008.
The big growth driver was pensioner buy-ins with about two-thirds
of the cases over £100 million done on this basis, said Belok.
In essence, in a buy-in a bulk
annuity policy is secured for current pensioners and is held by the
scheme as an investment, rather than individual policies being
bought for members and the scheme then being wound up, he
explained.
Another feature of the market in 2008 was an
increase in competition with the number of participants increasing
from 6 to 11. As recently as 2005, Prudential and L&G were the
only market participants while the number stood at three in 2006
following Paternoster’s entry.
Among newcomers in 2008, Rothesay Life, a
wholly-owned unit of US investment bank Goldman Sachs, secured one
deal when in February it bought out the Rank Group Pension Scheme,
which had assets of about £750 million.
According to DB pension fund consultancy
Pension Capital Strategies (PCS), Rothesay subsequently reinsured
the pensioners with Prudential.
Another new entrant was US insurer MetLife
which made its debut by securing five deals worth a total of £230
million. In its largest deal, MetLife bought out the liabilities of
the Vivendi 2008 Pensioners’ Scheme in a deal worth about £130
million.
PCS highlighted that the Vivendi deal was
notable for MetLife’s use of its same-day transaction model which
entails the valuation of scheme assets and liabilities and
quotation price of a buy-out being agreed only on the day of the
transaction.
This model requires significant advance work
but enables trustees to enter into a contract with greater
certainty by minimising their exposure to volatile markets, noted
PCS.
Last year also saw a degree of market
consolidation with the acquisition by PIC in November of Synesis
Life, a bulk annuities specialist backed by JPMorgan, The Royal
Bank of Scotland and Warburg Pincus. Established in 2006, Synesis
had yet to execute a deal at the time of its acquisition by
PIC.
Mixed prospects
|
UK PENSIONS BUYOUT MARKET |
|
|
Buy-out quotations obtained |
|
|
Value (£bn) |
|
|
Q1 2007 |
4.3 |
|
Q2 2007 |
5.5 |
|
Q3 2007 |
13 |
|
Q4 2007 |
14.6 |
|
Q1 2008 |
16.1 |
|
Q2 2008 |
20 |
|
Q4 2008 |
22.2 |
|
Q4 2008 |
18.6 |
|
Source: Pension Capital Strategies |
|
Last year could well prove to have been the peak year for the DB
pensions buyout/buy-in market for some time.
“The fourth quarter in 2008 saw a
slowdown following the collapse of Lehmans and in particular the
impact this had on the corporate bond market,” said Belok.
“Lack of liquidity and uncertainty
around pricing and risk of default gave the insurers headaches
because corporate bonds are key assets they use to back annuities.
This meant that while there continued to be attractive deals to be
done, some insurers remained cautious.”
Indicative of the slowdown, Aon reports that
the value of business placed fell from £2.1 billion in the third
quarter of 2008 to £1.8 billion in the fourth quarter, while the
number of deals fell from 59 to 43. Similarly, PCS reports that the
value of quotations obtained from insurers by DB pension funds fell
on a quarter-on-quarter basis 16 percent to £18.6 billion.
However, despite this PCS takes a more
optimistic stance on prospects for 2009 than Aon though it does
anticipate that the market will remain “sluggish” in the early part
of the year.
“We remain bullish about the prospects for the
buyout market,” said PCS head of buyout services Tiziana
Perrella.
“If the wider economy does not suffer any
further shocks, we expect activity in the buyout market to increase
significantly later in the year, with a number of major deals being
concluded before the end of 2009.”
She added that PCS anticipates that a further
£8 billion worth of business will be written in 2009, with the
potential to increase to as much as £12 billion in 2010.
Undoubtedly there is great incentive for UK
companies sponsoring DB schemes to rid themselves of a huge
financial burden. Indicative of the burden consultancy Mercer
estimates that the 350 largest UK listed companies ended 2008 with
a combined funding deficit of £33 billion, up from £13 billion a
year earlier.
Adding further incentive to turn to insurers
for a solution, The Pension Regulator has warned companies that a
DB pension scheme recovery plan must take precedence over the
payment dividends to share-holders.
|
UK PENSIONS BUYOUT MARKET |
||||||
|
Market participants, 2008 |
||||||
|
Cases written 2008 |
Cases written 2007 |
Change (%) |
Value (£m) 2008 |
Value (£m) 2007 |
Change (%) |
|
|
Legal & General |
173 |
183 |
-5.5 |
1,817 |
1,105 |
64.4 |
|
Pension Insurance Corporation |
5 |
n/a |
n/a |
1,652 |
n/a |
n/a |
|
Prudential |
4 |
23 |
-82.6 |
1,370 |
55 |
1,391 |
|
Paternoster |
13 |
16 |
-18.8 |
1,071 |
1,393 |
-23.1 |
|
Norwich Union |
39 |
25 |
56 |
826 |
115 |
618 |
|
Aegon |
15 |
10 |
50 |
124 |
105 |
18.1 |
|
AIG |
14 |
2 |
600 |
36 |
19 |
89.5 |
|
Rothesay Life |
1 |
n/a |
n/a |
750 |
n/a |
n/a |
|
Lucida |
3 |
n/a |
n/a |
305 |
n/a |
n/a |
|
MetLife |
5 |
n/a |
n/a |
230 |
n/a |
n/a |
|
Total |
273 |
259 |
5.4 |
8,182 |
2,792 |
193 |
|
Source: Aon Consulting |
||||||
