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June 16, 2011updated 13 Apr 2017 8:48am

UK risk transfer market to grow by £20bn by 2012

Defined benefit pension scheme risk transfers continue to be a bright-spot in the UK life market with actuarial firm Hymans Robertson (HR) reporting that the number of deals awaiting finalisation are at by far the highest levels since before credit crisis.

By LII editorial

Defined benefit pension scheme risk transfers continue to be a bright-spot in the UK life market with actuarial firm Hymans Robertson (HR) reporting that the number of deals awaiting finalisation are at by far the highest levels since before credit crisis.

“There are several multi-billion pound buy-ins and longevity swaps currently being tendered and expected to complete during 2011,” said James Mullins, HR’s head of buyout solutions.

He added that many providers have acknowledged that they are currently devoting “serious resources” 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,” noted Mullins. “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 raising serious questions for companies over the merits of continuing to run significant risk within their DB pension schemes.”

However, in the first quarter of 2011 activity was subdued. According to the actuarial firm, the value of new buy-in, buyout and longevity deals finalised was £350m ($550m), down from £1.63bn in the fourth quarter of 2010.

In the 12 months to 31 March 2011, a total of £4.5bn of risk transfer deals were completed – the majority of which were buy-ins.

The quiet first quarter of 2011 was only a lull before activity accelerates, believes HR, which predicts that the number of new buy-in and buyout deals struck in the second quarter will reach a new record.

The firm expects a surge in longevity swaps where activity has been extremely quiet with only one deal completed in the first quarter of 2011. This was the first since the first quarter of 2010.

By the end of the first quarter of 2011, insurers and banks have taken on risks associated with around £30bn of pension scheme liabilities. HR expects this to rise to £50bn before the end of 2012.

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