Pension Insurance Deals to Be More Pricey

Pensions consultancy Lane Clark & Peacock predicts pension fund 'buyout' deals, where insurance companies takeover schemes' risk, are set to be about twice as popular this year as in 2009, but insurers may run out of capital.

(May 12, 2010) — According to a new report from consulting actuary firm Lane Clark and Peacock (LCP), the cost to companies of transferring their pension scheme risk of people living longer to an insurer is set to rise as surging demand, driven by improvements in scheme funding levels, starts to exceed supply.

“Recovering funding levels have improved affordability since 2009 and, as recent experience shows, funding positions can change materially over days,” said Clive Wellsteed, partner and head of LCP’s buyout practice, in a statement. “A sustained upward swing will mean insurers struggle to satisfy demand.”

LCP’s third annual report reveals £15 billion ($22 billion) of new de-risking business will be written during 2010. This is more than double the £7.5 billion in 2010. Yet, the report warmed insurer capacity is limited — insurers can write no more than £10 billion of buyout or buy-in business each year before prices start to rise, LCP estimated in the report.

With retirees living longer, insurance companies have been increasingly looking for ways to transfer pension liability. Longevity swaps, in which pension schemes are protected against the risk of paying for longer-living pensioners in exchange for an agreed stream of payments, has been a popular solution.

“There are six reinsurers actively reinsuring longevity risk at the current time with an overall appetite of about 20 billion pounds,” stated the research. “Reinsurance appetite and pricing are therefore key to the development of the longevity hedging market.”

Separately, Hymans Robertson said last week that it expected pension scheme risk transfer deals to grow to over £15 billion during 2010. The consulting firm’s February report showed that 2009 saw about £7.8 billion of pension scheme risk transfer deals, with more expected during 2010. The research indicated 2009’s third quarter was the “highest ever” quarter for those transfers with £3.9 billion, due to longevity swap deals completed by RSA Insurance, Babcock International, and the Merchant Navy Officers Pension Fund’s £500 million buy-in.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742