UK - The second quarter will see a record number of UK defined contribution (DC) pension schemes de-risking, according to Hymans Robertson.

The consultancy's 'Managing Pension Scheme Risk' quarterly report found that Q1 saw £350m (€401m) of risk transfer deals completed, including buy-ins, buyouts and longevity swaps, and it expects the trend to continue in Q2.

Hymans Robertson attributed the surge to the raft of final salary closures over the past two years, as well as to restrictions on tax relief for high earners' pension contributions.

It also found that the pipeline for new risk transfers was currently at its highest level, exceeding that recorded before the financial crisis.

In total, approximately £4.5bn of de-risking deals were completed in the year ending 31 March.

Insurance companies and banks were the main players in the market, having taken as much as £30bn of the risk associated with pension schemes since 2006-07.

According to Hymans Robertson, this number is expected to increase to £50bn before the end of 2012 as members of defined benefit pension schemes increasingly rely on those companies to provide their pensions.

James Mullins, head of buyout solutions at Hymans Robertson, said: "Our analysis illustrates that it won't be long before £50bn of pension scheme risk has been transferred to insurance companies and banks.

"Banks and insurers continue to offer new flexibility to make risk transfers accessible and more affordable to all pension schemes. 

"It is crucial that companies and trustees be aware of this flexibility and innovation to ensure  they do not miss excellent opportunities to reduce risk. In addition, schemes are increasingly keen to manage away as much risk as they can."

The report shows the market has been dominated by a number of companies, including: Rothesay Life, Aviva, Prudential Pension Insurance Corporation, Legal & General (L&G), MetLife and Lucida. 

Rothesay Life led the field with around £1.4bn of deals completed during the year to 31 March, while Prudential and L&G reached the second and third position of the ranking with £892m and £764m, respectively.

A large part of the de-risking instruments used were 'enhanced buy-ins', as they enable many UK pension schemes to reduce the buy-in cost.

Mullins said: "2010 was the third successive year during which £8bn of pension scheme risks were transferred via buy-ins, buyouts and longevity swap deals. 2011 is likely to see a substantial increase above these levels.

"Longevity is widely viewed as one of the biggest unmanaged risks schemes face. While we will undoubtedly see an upswing in companies offloading longevity risks, one of the obstacles to pricing longevity swaps 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."

Topics