Seeking to Transfer Risk, Pension Buyouts Flourish Among UK Schemes

UK pensions are increasingly transferring risk to insurance companies, driven by M&A activity, a growing number of closures and part-closures of defined benefit pension schemes, and concerns over longevity risk.

(March 20, 2011) — A report by Hymans Robertson has shown that UK pension buyouts, in which an entire scheme is passed to a specialist insurer, are becoming more and more prevalent.

“An increase in mergers and acquisitions activity is driving this,” James Mullins, head of buy-out solutions at Hymans Robertson, told the Financial Times. “Any potential purchaser will welcome a company that has already done a deal to transfer risk to an insurer. There is less to worry about,” he said, noting that concerns over longevity risk coupled with a greater number of closures and part-closures of defined benefit pension schemes have fueled the trend.

The consultant firm found that the combined value of buyouts reached $8.4 billion in 2010, compared to $6 billion in 2009. Overall deals, including longevity swaps, rose to $13.3 billion for 2010, above the $12.8 billion seen in 2009 and $13 billion in 2008, the FT reported.

A recent example illustrating the growing popularity of risk transfer deals is the Pension Insurance Corporation’s (PIC) decision last month to reinsure $799 million of longevity risk to better manage risk and more effectively compete for new business.

The move reflects the efforts among insurers to free themselves from risk as a result of pensioners living longer than expected, known as longevity risk. According to some forecasts, more than $24 billion worth of pension risks could be passed on to insurers this year. PIC has said its transactions indicate the insurer’s desire to focus on risk management and on the efficient allocation of capital.

The reinsurance by PIC has been undertaken in two separate transactions, taking the amount of longevity exposure which the firm has reinsured to 70% of its total, or $3.7 billion. “These transactions build on our active longevity reinsurance policy and allow us to efficiently manage our capital,” said PIC’s chief financial officer Rob Sewell in a statement. “We look forward to further transactions of this nature, backing up our promise to bring safety and security to pension fund members’ benefits. We also look forward to writing further transactions this year, in what we expect to be a busy year for the pension insurance market.”

“There has been a lot of interest from pension funds in derisking since the start of the year,” said one industry observer close to the PIC, noting that the insurer expects about £6 billion of insurance business within the first six months of the year. “Because of the way the markets moved last year, a lot of pension funds are better able to afford insurance,” the source told aiCIO. “There’s an increased desire to secure pension benefits.”

In January, Swiss Re, the giant European-based reinsurer, decided to transfer $50 million in longevity risk. According to The Wall Street Journal, such hedging opportunities have waned since the onset of the financial crisis, with $2.2 billion in “extreme-mortality securitizations” executed before 2008 and little to speak of after. The investors in the Swiss Re deal, as would be expected, are largely pension funds and other insurers, the Journal reported.

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