Pension scheme risk transfers to double by 2017
28 Mar 2013 - Estimated reading time: 3 minutes
A competitive pricing environment and increased demand from defined benefit pension schemes to manage risk is expected to see insurance companies and banks take on £100bn of liabilities before the end of 2017.
The key findings of Hymans Robertson's Managing Pension Scheme Risk report for Q4 2012 are:
- Insurance companies and banks have now taken on the risks associated with over £50bn of pension scheme liabilities since the risk transfer market took off in 2006/2007
- Hymans Robertson expects this total will rise to £100bn before the end of 2017, with several multi-billion pound deals currently being tendered and expected to be completed during 2013
- 2012 was another strong year for the pension scheme risk transfer market, meaning that the average value of deals over the last five years has been around £8.5 billion a year
- Buy-ins and buy-outs have covered around £4.5bn of pension scheme liabilities in the 12 months to 31 December 2012
- Longevity swaps have now covered almost £20 billion of pension scheme liabilities since 30 June 2009
- Tate & Lyle (£347m buy-in in Q4 2012) and BAE Systems (£3.2 billion longevity swap in Q1 2013) became the 17th and 18th FTSE 100 companies to complete material risk transfer deals (both deal with Legal & General) for their defined benefit pension schemes
- Hymans Robertson expects that half of all FTSE 100 companies will have completed a material pension scheme risk transfer deal by 2017
- Market conditions and increased competition are leading to attractive pricing conditions for schemes considering a risk transfer deal
- Pension Insurance Corporation enjoyed a successful year taking one third of the market share (by value) of buy-in and buy-out deals during 2012
- Given the ever increasing demand from pension schemes to transfer their risks, it would be no surprise to see new insurance companies entering this market during 2013
Hymans Robertson reports a total of £6.7bn of pension scheme risk transfer deals completed in 2012 and expects this figure to grow significantly during 2013 and beyond.
James Mullins, Head of Buy-out Solutions at Hymans Robertson, comments:
Our analysis shows that insurance companies and banks have taken on the risks associated with over £50 billion of pension scheme liabilities since 2006/2007. With the pipelines in this market looking strong, and with increasing demand, we expect this figure to rise to £100bn before the end of 2017. Buy-ins and buy-outs covered around £4.5bn of pension scheme liabilities in 2012 and the pricing of deals continues to look attractive in the current market. In addition to this, as banks and insurers offer more flexibility, deals will become increasingly affordable for many UK pension schemes. It is a similar story in the longevity hedging market. Our clients are finding that the competition in the market is leading to some attractive pricing for removing longevity risk and this is a key driver for the recent level of longevity swap activity. We anticipate that this pace of activity will continue to accelerate and expect to see a number of large transactions complete this year. Given the competitive market conditions, it is no surprise that we have seen several FTSE 100 companies complete risk transfer deals for their pension schemes in recent months. We expect to see this trend continue and anticipate that half of all FTSE 100 companies will have completed a pension scheme risk transfer deal by 2017. Our report shows that almost half of all buy-in and buy-out deals, by value, in 2012 were completed in Q4. The market will be further buoyed as demand for pension scheme risk transfer becomes a key consideration for scheme trustees. Many trustees are now working towards a secondary 'self-sufficiency' funding target which they are then using as a benchmark to measure risk. Putting in place a longer-term strategy can also ensure that trustees are ready and able to make decisions quickly, to capture any short term opportunities to reduce risk when market conditions improve.
The report shows that the buy-in and buy-out market in 2012 was dominated by Aviva, Legal & General, MetLife, Pension Insurance Corporation, Prudential and Rothesay Life. Pension Insurance Corporation led the field with 32.7 per cent market share (by value).
James Mullins adds:
While there has been consolidation in the buy-in and buy-out markets in recent years, the increased demand for pension schemes to transfer their risks may lead to new providers entering the market in 2013.