Are Mega-Buyout Deals on the Cards?

Consultants and insurers tell aiCIO there is scope for further pension buyout headlines.

(July 10, 2013) -- Music group EMI's £1.5 billion buyout, unveiled on July 9, has reignited interest in the pension risk transfer market, leading to the prediction of a few more mega deals before the year is out.

Government bond yields and high-quality corporate bond yields have increased in recent weeks, combining with a brief rally for equities to narrow funding gaps and create buying opportunities for pension schemes.

As the deficits lessened, employers and plan sponsors have found themselves more willing to offer a sweetener in the form of a cash injection to help the pension fund reach the transaction point.

While the EMI deal in the UK is a specialised case, all of the derisking experts aiCIO spoke to admitted to an increase in interest from pension funds seeking to transfer risk.

Glenn O'Brien, managing director of Prudential's pension risk transfer business, said the US was starting to see an increase in sponsors willing to transact.

"I was less optimistic [about the buyout market] at the beginning of the year, as companies were focusing on their year-end disclosures. But the macro-economic situation has improved and we're starting to see a pick-up in interest in companies willing to deploy cash," he said.

"As funded statuses improve through the movement of rates, pension funds will find they're closer to being fully funded. It'll be hard for a lot of transactions to happen all at once, but certainly more will be considering a pension risk transfer."

O'Brien also said he believed the US pension risk transfer market could "top $5 billion" in deals this year, adding: "I get the sense there's potential for one or two more large deals this year too."

The increased interest in the US was confirmed by Ian Aley, head of pension risk solutions at Towers Watson. This was in part because there are two issues the UK suffers from which don't apply to the US market.

"There's no inflation linkage issue, unlike in the UK, which from an insurer's perspective is helpful," said Aley.

"And unlike in the UK, where pension funds pay benefits to the member and their spouse at the time the member dies"-i.e. if the member marries after they begin drawing benefits, the insurer has to honour their spouse even though it wouldn't have known about at the time of pricing-"in the US they have individuals who are named up front, so it's easier to absorb that risk."

Emma Watkins, partner at consultant LCP, was convinced the improving macro-economic situation was the key factor behind any forthcoming transactions.

"On the basis that pension risk transfers are where most people are heading, the biggest barrier is the funding gap," she said.

"When we were in an environment of low gilt yields, the price for deferred liabilities had a much bigger gap than what we see today.

"If you can close that gap through gilt yields increasing and at the same time see assets, such as equities, returns' increase, you could get to the point where an employer is willing to put in a cash injection to get it over the line."

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