Recent financial turmoil has temporarily iced the pension scheme buyout market in the U.K., but it hasn't diminished plan trustees' interest in unloading risks and preparing to sell once financial markets stabilize.
“The market is probably taking a deep breath” at the moment, said Andy Reed, director of defined benefit solutions at Prudential PLC, London. The firm offers buyouts, which is essentially an annuity for all or part of a defined benefit plan's liabilities. Prudential sold two policies in 2008 for £1.3 billion ($2.2 billion), including a £1 billion deal with Cable & Wireless PLC, London, bringing its total buyout assets to £10.4 billion.
At issue is pricing a pension's investments and liabilities in the current environment, as well as insurers' unease at taking on more risk or having to price bonds they use in annuities. Also, corporate executives that have been asked to pay for the buyout — which can typically cost 10% to 30% in excess of plan liabilities — have likely wanted to wait out the crisis.
“That said, there are still transactions going ahead,” said Hugo James, sales development director for bulk purchase annuities at insurer Legal & General Group PLC, London. One client who Mr. James would not identify expects to close the buyout of its £100 million plan within the next two weeks.
L&G bought out 172 plans in the first three quarters of this year for a total of £1.6 billion, an increase of 226% over the same period in 2007. L&G's total buyouts are valued at about £15 billion.
Plans on the verge of taking a buyout probably were not significantly hurt by free-falling equities markets in October, experts said.
“Schemes that are close to buyout are already de-risked ... and are relatively immune from market conditions,” said Mark Wood, chief executive officer at Paternoster UK Ltd., which has taken on £1.1 billion in assets so far in 2008, including the TI Group Pension Scheme, sponsored by Smiths Group PLC, London, and The Pensions Trust, the Leeds, England-based multiemployer plan for workers at non-profits. Each plan had more than £200 million in assets.
Paternoster's fourth quarter will be weaker than expected, Mr. Wood said. He predicted that industrywide buyouts would reach £7.5 billion to £8.5 billion in 2008, less than an earlier forecast of £10 billion to £12 billion.
Prudential's Mr. Reed estimated 2008 buyouts of £6 billion to £8 billion industrywide. “But those transactions (that would have taken place in the fourth quarter) will simply move to next year,” he said.