LONDON — The total value of three major pension buyout deals announced this month surpassed all of the first nine months in 2007, leading some consultants to believe that demand is on the upsurge.
In one of the latest deals, about £800 million ($1.6 billion) in defined benefit pension assets and liabilities will be transferred to London-based Paternoster U.K. Ltd. The assets are linked to a group of retired employees at Peninsular & Oriental Steam Navigation Co., London, a company acquired in 2006 by Dubai Ports World, based in Dubai, United Arab Emirates. Under the terms of the agreement, Paternoster will manage the pool of assets and provide future pension payments for the contracted pensioners.
Paternoster also announced this month that the firm will acquire £150 million in pension assets and liabilities will be transferred from London-based Eni Lasmo PLC, an oil and gas company.
The Weir Group PLC, Glasgow, also plans to transfer £240 million of pension assets to Legal & General Group PLC, London, in a similar arrangement.
“In the fourth quarter alone, we’ve seen multiples of what we’ve seen in the previous three quarters combined,” said Paul Belok, principal and actuary at Aon Consulting in London. “There’s been an awareness that has built up over the past 12 to 14 months, prompting organizations to take a closer look (at buyouts) ... these high-profile cases will help to build momentum.”
Consultants expect accelerated growth in 2008. Mark Wood, chief executive of Paternoster, said the number of companies asking for quotations, which are cost estimates of a pension buyout transaction, and the average value of those quotations have increased by about tenfold in the fourth quarter of 2007 compared to the same period in 2006.
“Certainly the pipeline is very strong,” said Mr. Wood, whose company manages about £1.6 billion in pension buyout assets. “We did over £3.5 billion worth of quotations for the week before Christmas; that’s substantial.”
Having garnered great fanfare as a practical — albeit expensive — solution to remove pension assets and liabilities from the corporate balance sheet, companies that offer such services generally have not met market expectations, consultants said.
“The insurance buyout market for defined benefit pension schemes is struggling to take off,” according to a report published by Aon in November. In the three quarters ended Sept. 30, the Aon report said total pension buyouts were valued at £896 million, which is lower compared to the same period in 2006.
However, the number and value of quotations sought by companies increased over the same period. “We’re on the cusp of a step change effectively,” Mr. Belok said.
A survey conducted by PricewaterhouseCoopers LLP, London, indicated that 27% of 193 respondents are considering offloading some or all of their pension assets and liabilities. Of those, 11% said they are looking to do so within the next five years. The survey, which included queried company officials from 193 U.K.-listed corporations, subsidiaries of overseas companies and privately owned firms, was conducted in July and August.
“Companies are seriously looking at options for managing (pension) risks more effectively,” said Mark Hommel, pensions partner at PwC based in London.
The buyout option has become more attractive as pension funds have become better funded in the past several years due to a combination of buoyant equity market returns, cash injections from plan sponsors and higher bond yields. At the same time, recent market volatility might begin to play havoc on the returns of pension plans, and therefore, a company’s balance sheet, leading some sponsors to take a closer look at the buyout option, consultants said.
“At the moment, I think the difference between assets vs. cost of buyout is at the lowest it has been for years,” said Stuart Faloon, principal and senior actuary at Mercer LLC based in London. Mr. Faloon has advised on pension buyout transactions.
Earlier this year, Mercer launched a platform that helps pension plan executives find the best buyer through an online auction. There are three main factors: pricing; the financial strength of the company; and the administration processes involved.
“The auction process is a negotiating tactic, to facilitate getting all the insurance companies into a virtual room at the same time,” Mr. Faloon said. “Instead of spending three or four weeks chasing around all the insurance companies, we can collapse that negotiating time scale into an afternoon.”
As of Dec. 17, there had been about half a dozen auctions, Mr. Faloon estimated. The pension buyout market is limited to the U.K. now, but it is being watched by plan executives in Europe, consultants said.
Mr. Faloon added: “If this proves successful in the U.K., and then Europe, there may well be some interest coming from the U.S.”
