UK - Pension trustees who have been put off from considering an immediate scheme buyout by increasing prices and the impact of current economic conditions are being targeted by UBS Global Asset Management and AEGON to look at alternative propositions.
The two companies entered the buyout market over a year ago with the UBS AEGON Affordable Risk Transfer Solution (ARTS), but admit there was limited interest at the time in their adaptation of LDI solutions as quotes for immediate buyouts were more attractive and scheme funding levels were generally good.
UBS and Aegon have now kickstarted their campaign again, claiming trustees and employer sponsors who started considering a buyout several months ago are now finding the funding gap to reach a buyout has widened as as recent market turmoil has caused the value of most schemes' assets to fall and the liabilities valued by gilt or corporate bond yields to increase.
John Harrison, head of UK institutional advisory solutions at UBS, pointed out for most schemes buyout is no longer realistic, but some trustees are looking to tie down risks such as longevity, to give them time to generate returns and reach the funding level necessary for buyout through a combination of investment return and phased sponsor contributions.
Officials claim the ARTS proposition could be one alternative to an immediate buyout because under the terms of the solution trustees - generally of schemes with more than £100m (€127m) in liabilities - enter into pre-agreed buyout terms with AEGON, which will then be held in place for seven years, providing the scheme with a 'longevity lock'.
Once the buyout terms are in place then UBS works with the trustees to develop a 'roadmap' for its investment strategy to generate enough returns to meet specific triggers for de-risking, through the use of liability-driven investment (LDI) strategy and overlays in certain asset classes, which will allow certain tranches of the scheme to be transferred to AEGON as a phased buyout.
Trustees could also lock in the buyout terms earlier if investment returns are higher than anticipated and they are similarly not obliged to complete the full buyout if the funding ratio of the scheme has not improved sufficiently.
Harrison pointed out: "The model is quite flexible so if a scheme does well and hits the triggers earlier then it can complete the buyout within seven years. And if it doesn't do quite as well then the investment strategy can be changed."
However Harrison warned: "Trustees need to have realistic expectations. If the funding level is poor, or the employer is unwilling to make additional contributions or they are too low, it is unlikely that the scheme would be able to fund a buyout within seven years. In this case ARTS is less likely to be applicable to the whole scheme."
UBS said " a couple of clients" are now going through the process of adopting a phased buyout, though Harrison warned it can take several months to begin as AEGON needs to conduct the same liability assessments as any other insurer undertaking a buyout.
Elsewhere, Paternoster has reported a 23% increase in new business in the third quarter of 2008, bringing the total value of new business for the year to date to £1.1bn when it had been suggested the traditional buyout market is beginning to slow.
That said, Mark Wood, chief executive of Paternoster, has admitted: "Our success in Q3 came ahead of the recent market turmoil. Setting reliable estimates of cost, while always exacting, is in the current market fraught with difficulty.
"We understand trustees and their advisers deferring the decision to transfer all or a portion of a pension scheme off balance sheet to an insurer until markets are more settled. We anticipate that some of the transactions that might have taken place by the end of this year may now take place early next year," 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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