UK Report Says Buyouts, Buyins Are at Peak of Attractiveness as Pensions Derisk

(June 8, 2011) — De-risking using buyouts, buyins, and longevity swaps have never looked more attractive, says UK-based consultant Lane Clark & Peacock (LCP).

In a report published today, the firm notes that as pensions tackle the mounting costs of defined benefit schemes, pension scheme buyouts — in which companies transfer their closed pension plans to insurance firms — and other derisking strategies will become more common. The consultant’s latest pension buyouts report said that the continuing closures of DB schemes coupled with robust gains in assets since 2009 have made buyins more affordable and consequently a more popular derisking option.

According to the firm, buyins and buyouts are a natural way to lower risk in funding levels, accounting deficits and cash contributions. “With over 15% of UK pension plans now closed to future accrual, a growing number of pension plans are considering these options,” LCP’s fourth buyout report for finance directors, trustees and the other senior decision makers claims.

Furthermore, the report finds that the pensioner buyins, buyouts and longevity swaps have reached nearly £30 billion ($49 billion) worth of transactions. By comparison, total business volumes peaked at a total of £8.3 billion last year, which was largely driven by smaller deals as more than 90% of transactions in 2010 were less than £50 million.

A report last month by Hymans Robertson provided further evidence confirming the embrace of derisking strategies in the UK. With $7.2 billion (£4.5 billion) worth of risk transfer deals completed over last year, the second quarter of 2011 looks to be a record quarter for the number of buyin and buyout deals completed in the UK, according to the consultancy, and pensions will transfer their risk to banks and insurers, leading to a record number of deals to complete buyouts, buyins, or longevity swaps. James Mullins at Hymans stated in a release that by the end of 2012, one in four FTSE 100 companies would have completed either a buyout or a buyin.

“Our analysis illustrates that it won’t be long before £50 billion of pension scheme risk has been transferred to insurance companies and banks,” Mullins said. “2010 was the third successive year during which £8 billion of pension scheme risks were transferred via buy-ins, buy-outs and longevity swap deals. 2011 is likely to see a substantial increase above these levels.”

Jibing with LCP’s and Hymans Robertson’s reports, the Pension Corporation, the buyout specialist founded by City investor Edmund Truell, has completed a deal to buy £60 million worth of pension liabilities from Toray Textiles, one of the biggest manufacturers of woven polyester and nylon in Europe.

Similarly, last month, Prudential Retirement completed its first US buyin with a $75 million pension risk transfer. North Carolina-based Hickory Springs Manufacturing Company selected Prudential’s Portfolio Protected Buy-in to complete the pension risk transfer transaction.