UK - The UK defined benefit (DB) buyout market reduced by 50% in the first quarter of 2009, as the total value of agreed transactions totalled less than £900m (€1.02bn).

Latest figures from Hymans Robertson and Aon Consulting suggested while the value of the deals halved from the end of December 2008 there is "still a reasonable level of interest" despite the impact of the credit crunch.

The two consultancies differed slightly on the figures as Hymans Robertson reported a total of 43 deals with a combined value of £879m, while Aon Consulting revealed a total of 44 deals valued at £888m.

Both firms noted, however, that Pension Insurance Corporation (PIC) completed the largest deal through the £230m buyout of the Leyland DAF scheme in January, although Legal & General completed the most business in the market with transactions equalling £485m. (See earlier IPE article: PensCorp to deliver Leyland DAF buyout)

Hymans Robertson also revealed only five of the main insurance companies in the bulk annuity market completed deals in the first quarter - Aegon, Aviva, L&G, MetLife, and PIC - while other firms, including Paternoster, Lucida, Prudential and Rothesay Life, did not secure transactions.

Despite the tail-off in the "extremely high levels of interest" in 2008, Aon claimed although the headline numbers do not appear to be very strong "the bulk annuity market has in fact been relatively resilient given exceptional market conditions".

Paul Belok, principal and actuary at Aon, suggested the market "continues to be a viable option for a number of schemes", and added the schemes that are "continuing to investigate the market are doing so seriously".

He added: "These schemes tend to have a relatively cautious investment policy and are often reasonably well funded - other situations can be linked to M&A activity, a large parent seeking to close out its DB pensions exposure in a subsidiary, or an insolvency situation."

However both Aon and Hymans noted a growing trend in "DIY buy-ins" where schemes combines a Liability Driven Investment (LDI) strategy with a longevity hedge, as Hymans pointed out this is offered by the "majority" of buy-out insurers, as well as non-insurers such as Credit Suisse and JP Morgan who "have also been very active at issuing quotations for longevity hedges".

The highlighted trend follows confirmation last week that Babcock International's pension schemes became the first funds to agree a longevity hedge deal, although Belok warned: "this route is not really viable at present for liabilities relating to members who are below retirement age, however, because of the longer durations involved". (See earlier IPE article: Consultants predict potential longevity market of £15bn)

Meanwhile James Mullins, senior actuarial consultant at Hymans Robertson suggested trustees engaged in buy-in negotiations are likely to increase demands for additional security in the form of ring-fenced assets.

This is where insurers agree to hold the buy-in money received from the pension scheme as a separately identifiable pool of assets in the name of the trustees, so that these ring-fenced assets are then available to the pension scheme should the insurer get into financial difficulties.

Mullins pointed out: "When assets are not ring-fenced, trustees are forced to compete with other creditors over the remaining reserves held by the insurer.  Indeed, we are now seeing many insurers automatically offer this facility to ring-fence or ‘collateralise' assets as part of buy-in deals - a change of approach over the last year."

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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