UK - The pensions buyout market reached £2.2bn (€2.77bn) in the first quarter of 2008, driven by a reduction in price resulting from increased competition and the effects of the credit crunch, Aon Consulting has revealed.

In its latest quarterly buyout market survey  - based on direct information from buyout providers - Aon revealed the number of cases placed increased from 75 at the end of 2007 to 87 at the end of March 2008, while the total value of business was over £350m higher than the previous quarter.

The average value per scheme placed was £25m per scheme, similar to the figures from the fourth quarter of 2007, although the number of quotes for new business fell slightly from 432 at the end of December to 401, although the total value for the 'pipeline' of business is higher at £46.1bn compared to £40.9bn.

As a result, Paul Belok, principal & actuary at Aon Consulting, suggested if current levels of activity continue and the conversion rate of quotes to placements is maintained, the market could reach around £10bn by the end of 2008.

This supports recent research from Lane Clark & Peacock (LCP), which also argued the market could hit £10bn by the end of the year, and predicted the first FTSE 100 company buy out their pension scheme would be "imminent". (See earlier IPE story: Buyout market to pass £10bn in 2008)

Belok said: "A key driver for the interest being shown in bulk annuities has been the significant reduction in prices in recent months, a result of the highly competitive market and the increase in long-dated corporate bond yields - this is one area where the credit crunch has actually been beneficial."

He pointed out because of this a number of pension schemes and employers have recognised "the timing is attractive for either a full buyout or (increasingly commonly) a partial buyout, particularly of liabilities relating to pensioners".

That said, he warned "there are reasons to believe that the current window of opportunity to remove investment and longevity risk from pension schemes at an attractive price will not last indefinitely".

"The scramble for business among bulk annuity providers may not be quite so desperate in future as volumes increase and capacity issues potentially resurface, and signs are also emerging of credit spreads starting to close," he added.

But Belok admitted in the short-term there is significant demand at current prices and predicted "many of the cases that are actively investigating the market will transact, which will help sustain levels of business over the next few months".

For exmaple, Robert Wiseman Dairies confirmed in its final results published today it had initiated a complete buyout with Legal & General (L&G) at the end of 2007 to remove its exposure to DB pensions.

The company highlighted its current pension arrangements operate on defined contribution basis, however when it acquired Aberdeen Milk Company in May 1999 it inherited the firm's closed DB scheme.

The scheme, which had a deficit of £100,000 at March 31 2007, received annual contributions of £240,000 a year from Wiseman so the firm said it had "sought to transfer the responsibility for the liability to another party".

It accepted a quote from L&G on October 23 2007 and began the pension wind-up process, with the assets of the scheme transferring to the insurer at the end of November and L&G accepting responsibility for the investment and deferred mortality risk.

However, Wiseman admitted it remains responsible for the pensioner mortality risk for the DB scheme until the wind-up process is formally completed, though it said it is not expected to pay any further "material payment" to L&G in relation to the buyout.

The company said the decision to buyout the scheme makes it "unique among its peers" as it has reduced its business costs by £240,000 a year and also "removed an element of uncertainty from our balance sheet".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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