UK - The value of longevity swap deals covering UK pensioner liabilities outstripped the combined value of buyout and buy-in transactions in 2009, despite the market only taking off in the third quarter of the year.
Figures from Hymans Robertson's Managing Pension Scheme Risk report showed the total value of 168 buyout/buy-in deals in 2009 reached £3.67bn (€4.22bn). In contrast, the six longevity deals completed by the end of the year through just three operators covered liabilities of approximately £4.1bn.
In the bulk annuity sector, Pension Insurance Corporation (PIC) dominated the market in terms of value. Even though PIC only completed 10 deals - against Legal & General's 82 - the assets covered by these transactions reached £1.11bn, compared to L&G which held second place with £828m. (Click on image, above, to see full view of data produced by Hymans Robertson)
Findings from the report also highlighted that buy-ins were more than three time times the value of buy-outs over the year - £2.8n against £900m - with the three largest bulk annuity deals in 2009 classed as buy-ins, Cadbury, the Merchant Navy Officers Pension Fund (MNOPF) and CDC. (See earlier IPE article: Cadbury completes £500m buy-in with PIC)
However, the data showed it is the longevity market that is expected to boom in 2010, following a successful second half last year, with Hymans Robertson estimating the longevity swap market could cover liabilities exceeding £10bn. (Click on image, above, to see full view of data produced by Hymans Robertson)
The consultancy noted 2010 has already started with rumours of potential deals, including reports suggesting BMW is looking to cover £2.5bn of liabilities in a longevity swap with Abbey Life, Deutsche Bank and Paternoster; Premier Foods is believed to be in negotiations to cover £2bn of liabilities of the Rank Hovis McDougall scheme, while UBS has recruited four specialists to set up its own offering. (See earlier IPE articles: Longevity hedge could drive pension risk for BMW UK and UK roundup: PPG Industries, Merseyside, Premier Foods)
And to coincide with the release of its 2009 results - which showed new bulk annuity business declined by 55% over the year to £88m - L&G has announced it is also entering the longevity market, which is considered to be a stepping stone to full buy-in/buyout as well as part of a scheme's DIY de-risking strategy.
Simon Gadd, managing director of annuities at L&G, said: "Typically, the transactions in this market will involve the larger pension schemes due to the time and resource required to set up the contract, which includes collateralisation and exit terms. As a result, we expect volumes of longevity business to vary considerably."
Hymans Robertson said in its report it is also "aware of two other longevity swap deals worth well in excess of £1bn which we expect to complete in the first half of 2010, subject to contracts". If these potential transactions do reach completion, the longevity swap market would easily surpass the 2009 figure of £4bn and amass an estimated £6.5bn in longevity deals.
James Mullins, senior liability management specialist at Hymans Robertson, confirmed that on the level of activity currently observed "we would not be surprised to see longevity swaps cover liabilities in excess of £10 billion in 2010".
He attributes this to a number of drivers which mean pension schemes are increasingly keen to manage away as much risk as they can. Mullins used as an example the fall in BT's share price over concerns about the size of its pension deficit, and the assumptions used to calculate it that have brought it into conflict with the Pensions Regulator.
Mullins said: "Longevity is widely viewed as one of the biggest unmanaged risks [companies] face. We expect to see more FTSE100 companies completing risk transfer deals for their pension schemes later in 2010 and beyond and would not be surprised to see other financial institutions on the list."
But he warned while longevity hedging deals are likely to be most common for large pension schemes conducting a DIY buy-in with interest, inflation and longevity swaps, one of the obstacles to pricing the longevity hedge is predicting life expectancy correctly.
"Companies and trustees need to understand their scheme's particular longevity risks which are based on the unique characteristics of their membership," he added.
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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