UK - Pension funds would be better off running their liabilities themselves than choosing buyout insurance in 84% of cases.
This is the finding of consulting actuaries Punter Southall, based on calculations of buyout insurers' typical value-at-risk and investment strategies.
A buyout effectively transfers responsibility for pension benefits from the original employer sponsor to an insurance company.
"Less than 1% of the UK's private sector defined benefit liabilities were bought out over 2007 and 2008, suggesting the vast majority of pension schemes concluded the buyout premium was not worth paying," said Richard Jones, principal and head of Punter Southall Transaction Services.
Jones estimated the total sum of UK buyout deals would be worth £3bn in assets this year, rising to £4-5bn in 2010.
He also said he believed the business written thus far can be explained by the unique circumstances of the sponsors involved and the heavy discounts offered at the end of 2007 and first half of 2008.
Punter Southall Transaction Services assists private equity firms assessing their prospective pension responsibilities when acquiring new businesses.
Its findings, published in a report entitled The False Dawn, are based on an insurance premium of 12% over the best estimate value of liabilities - the insurer's gross profit - plus a further 8% to cover the insurer's regulatory capital buffer.
Jones said discounts in 2007 and 2008 reduced premiums to as low as 2%. The figures are hypothetical but based on PSTS's understanding of market deals.
If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com
No comments yet