Pension scheme de-risking has bounced back in late 2016 after an extremely slow first half to the year.
Market conditions have been challenging all year for defined benefit pension scheme buyouts but there has been a “flurry of late deals closing this quarter,” according to Ruth Ward, senior consultant at JLT Employee Benefits (JLT).
In the first half of the year only just over £3bn of buyout deals were signed and no longevity swap deals were completed, which had been increasing steadily 2009-14, according to its latest buyout market watch report.
The report anticipates that transactions in 2016 will be short of the 2014 and 2015 totals, £13.2bn and £12.4bn respectively. However, when late deals are added in - including AEGON's £6bn Rothesay Life and £3bn to Legal & General - deployed insurer capacity will not look dissimilar.
The price of buyouts is linked to interest rates - buyouts become cheaper when rates increase. A scheme's liabilities (future pension payments) decrease when interest rates increase. While the assets side would also be hit it would typically go down less than liabilities so overall the buyout becomes cheaper.
Ward added: “There is no guarantee that the position will look better in future and, even if it does, it may prove more difficult to get a quotation and execute a transaction. In practice, this is likely to mean that trustees for all but the smallest schemes insure their schemes’ pensioner liabilities, or subsets of these, in the first instance, and cover more members at a later date."
Ward says some schemes are deferring buying in some or all of their liabilities until yields rise. However, schemes need to weigh the risk of waiting for yields to rise and liabilities decrease further against the risk of delaying and seeing a deal fail to materialise.
“We are aware of plenty of cases where schemes have been ready to complete a buy-in or buyout but have delayed in the expectation of an improvement in pricing which has just not materialised,” said Ward. Further, in some cases it is not obvious how the price will change as yields rise.
The largest completed deals so far in 2016 are the £1.1bn buyout of the Vickers Group Pension Scheme with Legal & General, the Electricity Supply Pension Scheme’s £1bn longevity swap with Abbey Life, and Aon’s Retirement Plan’s £900m buy-in with PIC.
“This time last year there was a lot of speculation that Solvency II would have a big impact on non-pensioner liabilities, but many buyout deals
The JLT report emphasised that there is a widespread misconception that low interest rates prevent pension buy-ins/buy-outs.
In contrast, JLT has seen a number of schemes seize the opportunity to transact on buy-in/buyout terms over the last few weeks. JLT found that even very small pension schemes of less than £1m have managed to obtain quotations and transact in H2 2016.
“We are encouraged that even the very smallest schemes of less than £1m have been able to obtain buyout quotations, allowing them to settle their pension liabilities.”
Ward identified Aviva as one insurer that has developed “more efficient processes” to cater for this end of the market, while continuing to quote on mid-large deals.