The U.K. pension fund buyout market, after being clobbered in the past year by the financial crisis, might be on the mend.
After an exceptionally slow start to 2009, interest in buyouts has returned in the past two months, providers say.
Executives at Pension Corporation LLP, a pension insurer, whose 2009 business through Sept. 30 was just £500 million ($817 million), expect to make final deals worth at least £1 billion by the end of the year.
“The downturn in demand was only temporary,” said David Collinson, partner and head of liability acquisitions at Pension Corporation in London. In the past two months, the insurer added £6 billion to its pipeline. “That tells us (the buyout boom in 2008) definitely was not a fad.”
In the U.K., buyouts are part of the bulk annuity market. In a buyout, a pension fund offloads all liabilities to an insurer in exchange for its assets plus a premium. In a buy-in, dominant over buyouts in recent years, a pension fund usually buys an annuity for only a portion of participants — typically the retirees. Broadly speaking, both buyouts and buy-ins are often referred to as “buyouts,” as both involve transferring liabilities to insurers via annuities.
More recently, longevity hedging, often using swaps, has been gaining popularity.
Hugo James, sales development director for bulk-purchase annuities at Legal & General Group PLC, London, the largest U.K. buyout firm, said interest in buyouts has returned, among both pension funds and insurance companies, some of which are pricing “quite aggressively.”
“We are seeing a number of schemes that missed opportunities in 2008 (to use bulk annuities) that are looking to take advantage of this cycle,” Mr. James said.
Not everyone's outlook so rosy. In a recent report, Mercer LLC estimated that buyout and buy-in deals industrywide would total £3 billion in 2009, down considerably from £8 billion in 2008. Total business through Sept. 30 was £2.4 billion.
In a separate report titled, “The False Dawn,” Punter Southall Transaction Services officials said that lower activity in 2009 proved their prediction in 2008 that “despite the hype ... the (bulk annuity) market would not take off to the extent that some of the new entrants ... were optimistically envisaging.”
The report added: “We do not expect activity to pick up to any great extent in the foreseeable future.”
“Demand has fallen off a cliff,” said Richard Jones, London-based principal at Punter Southall and co-author of the report. He acknowledges that “everybody wants to get to” the point where they can offload liabilities, but argues that the gap between pension assets and annuity pricing is wider than insurers want to admit.
“That's going to take five years to fix,” Mr. Jones said.