Over the past year, the pensions press has barely seen a month go by without a buyout or buy-in story. October 2009 saw Lucida reenter the buy-in sector with a bang, winning its largest ever deal to insure more than 20,000 pensioners with the Merchant Navy Officers Pension Fund.
Later that month, MetLife joined forces with actuaries Barnett Waddingham to offer buyouts to smaller schemes – which traditionally found the mechanisms too expensive – and quickly secured £20m worth of business from two schemes.
Longevity swaps rocketed in Q3 last year. The first three deals (Babcock’s deal with Credit Suisse, RSA’s deal with Goldman Sachs/Rothesay Life, Royal Berkshire’s deal with Swiss Re) were completed in this period, totalling nearly £4bn. Swiss Re later confirmed a groundbreaking deal with the Royal Berkshire Pension Fund to protect against longevity risk.
But the fledgling market hit a stumbling block once reinsurers realised demand outstripped supply, and promptly put their prices up. Lane Clark & Peacock (LCP) estimated the average cost of hedging a scheme’s longevity doubled between March and November 2009, from around 3% of liabilities to 6%.
Not wishing to be outdone, Pension Corporation announced a trio of buyouts in January 2010: the £15m acquisition of the entire Inchcape Shipping Services, a £50m buyout of the Panasonic Mobile Communications Development of Europe scheme and a £500m buy-in with Cadbury, carried out at the end of December.
Paternoster announced a £2.5bn longevity swap with BMW’s UK scheme – the largest ever, and its first deal since switching from direct insurance to product design.
Paternoster, readers will remember, was forced to relinquish its Financial Services Authority licence to write insurance business in April 2009, but maintained it would continue “working with third-party capital providers… with a specific focus on the emerging longevity risk transfer market”. This deal represented its first foray back into derisking provision since it completed a £250m pensioner buy-in deal with the TI Group.
It is also the first concrete move in the derisking market for Abbey Life – which Paternoster is using to write the deal – after the insurer said it was entering the space earlier this year.
Abbey Life’s parent company Deutsche Bank provided capital for the deal, which was constructed and priced by Paternoster’s actuaries.
In May, Credit Suisse and Swiss Re announced £5bn worth of longevity swaps between them, and Prudential launched its Future Premium Product at the beginning of this month – where longevity, inflation and interest rate hedges are given to a scheme for 10 years at no initial cost, in exchange for an agreement to perform a pensioner buy-in at the end of the decade, with the price set at market buy-in costs when the deal was struck.
It wasn’t all good news, however. Regulatory statements from the government concerning the immediate equalisation of guaranteed minimum pensions between men and women resulted in consultants predicting an enormous leap in costs, prohibiting smaller schemes from venturing into buyout.
Research from the Economist Intelligence Unit and Buck Consultants also found 21% of schemes wanted to engage in a buyout transaction, but feared the reputational impact from scheme members. And results from a MetLife survey in March 2010 showed 55% of schemes preferred to derisk using asset-risk hedging – liability-driven investment (LDI) and derivative strategies – rather than buyouts, buy-ins or longevity swaps.
Despite this, all the providers in this month’s survey felt broadly optimistic about the future of bulk annuity derisking, with most predicting a strong end to 2010. Indeed, as we went to press, Rothesay Life announced a risk transfer deal for British Airways’ pension scheme, completing a record £1.3bn buy-in.
And consultancy Hymans Robertson declared it expected one in four FTSE 100 companies to have completed a material pension scheme risk transfer deal by the end of 2012, with risk transfer deals expected to approach £15bn.
James Mullins, senior liability management specialist at Hymans Robertson, says: “Currently, the market is ideal for pension schemes to be able to replicate the DIY buy-in deal that RSA Insurance completed with Rothesay Life in July 2009.
“Pension schemes can make use of the current apparent anomaly in the government bond markets to fund a longevity swap, with potentially no adverse impact on the scheme’s financial position – despite removing material risks.
“I would not be surprised to see another one of the UK’s largest pension schemes completing such a buy-in deal over the summer, combining a longevity swap to remove longevity risk, with an LDI strategy to remove investment risk.”
Disclaimer: querying responses
One of the questions in this year’s survey was for the insurers to detail how much of the market share they thought they held, following all their transactions in 2009. While most of the estimates were accepted by the consultants Pensions Management spoke to, several believed Aviva and Rothesay Life were exaggerating their claims. Rather than it being a cynical ploy by either insurer, however, most consultants acceded it was more to do with the different ways insurers use to calculate market share.
