Key findings of the “Managing Pension Scheme Risk Report 2009” – during 2009:

• The longevity swaps market took off spectacularly with deals covering £4.1 billion of pension scheme liabilities
• Despite challenging economic conditions, buy-ins and buy-outs covered £3.6 billion of pension scheme liabilities
• The value of buy-ins was more than three times the value of buy-outs (£2.8bn of buy-ins versus £0.9 billion of buy-outs)
•  Market activity for buy-ins and buy-outs increased through the latter half of 2009 with £1.2 billion of deals completing in Q4
• Q3 2009 was the highest ever quarter for pension scheme risk transfers (£3.9 billion) due to the longevity swap deals completed by RSA Insurance and Babcock International and the Merchant Navy Officers Pension Fund’s £500m buy-in
•  Rothesay Life completed the biggest value of longevity swap deals totalling £1.9 billion, followed by Credit Suisse with £1.2 billion then Swiss Re with £1.0 billion
• In December 2009, Cadbury became the sixth FTSE 100 company to complete a material risk transfer deal for its pension scheme with a £500m buy-in with Pension Insurance Corporation (quickly followed by the seventh FTSE 100 company when Liberty International completed a buy-out with Pension Insurance Corporation in February 2010)

Hymans Robertson, the UK’s leading independent experts in benefits and investment, reports a total of £7.7 billion of pension scheme risk transfer deals completed in 2009, despite the challenging financial landscape, and expects this figure to double in 2010.

James Mullins, Senior Liability Management Specialist, at Hymans Robertson, comments:

“Based on the level of activity we are currently observing, we would not be surprised to see longevity swaps cover liabilities in excess of £10 billion in 2010. This is due to a number of drivers. One is that pension schemes are increasingly keen to manage away as much risk as they can. BT’s share price dropping due to concerns about the size of its pension deficit, and the assumptions used to calculate it is a case in point. Pension schemes need to understand the risks inherent in their schemes and manage them appropriately.  Longevity is widely viewed as one of the biggest unmanaged risks they face.

“Already in 2010 we have seen significant developments in the longevity swap market. This month it was reported that Abbey Life, in conjunction with Deutsche Bank and Paternoster, is nearing completion of a longevity swap covering around £2.5 billion of BMW’s UK pension scheme liabilities, which would make it the biggest ever risk transfer deal. Premier Foods is also reportedly in negotiations over a longevity swap deal covering around £2 billion of Rank Hovis McDougall’s pension scheme liabilities. In anticipation of significant interest from UK pension schemes, UBS, the investment bank, also announced that it has recruited four pension specialists to set up its longevity swap offering.”

The Hymans Robertson “Managing Pension Scheme Risk” quarterly report shows that the market for buy-in/buy-outs in 2009 was dominated by Pension Insurance Corporation (PIC), which took almost a third of market share, closely followed by Legal & General (L&G) with 22%. The value of buy-ins was more than three times the value of buy-outs (£2.8 billion versus £0.9 billion) and market activity for both increased through the latter half of the year with £1.2 billion deals completing in Q4.

The Credit Suisse/Babcock International and Rothesay Life/RSA Insurance longevity swap deals along with the Merchant Navy Officers Pension Fund buy-in with PIC ensured that Q3 2009 was the highest ever quarter for pension scheme risk transfers (£3.9 billion).

James Mullins added:

“It’s interesting to note that two insurance companies – RSA Insurance and Friends Provident, who specialise in managing other peoples’ risks have now completed significant de-risking deals for their own final salary pension schemes. We expect to see more FTSE100 companies completing risk transfer deals for their pension schemes later in 2010 and beyond and would not be surprised to see other financial institutions on the list.

“While we will undoubtedly see an upswing in the number of 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 work of our sister company, Club Vita for example, which is the only company dedicated to providing longevity services, should help ensure they can assess the potential value of a longevity swap correctly.”

Buy-outs / buy-ins—Deals during Q4 2009

The total value of buy-out and buy-in deals struck in Q4 2009 was £1.2 billion (£3.6 billion for the whole of 2009):

*Prudential’s Q4 2009 figures are due to be published on 24 February 2010. We do not expect their figures to materially affect the above totals.

Longevity swaps—Deals during Q4 2009

The approximate value of pensioner liabilities (measured on a buy-in basis) covered by longevity swap deals struck in Q4 2009 was £1.2 billion (£4.1 billion for the whole of 2009):

To view the full report please click here