Schemes warned over buyout dangers

The consultant said the dangers included paying to much for risk reduction, remaining over-exposed to future risks, missing opportunities in the market and failing to adequately vet providers.

Mercer consultant Andrew Ward said: "Pensions risk is on everyone’s agenda right now, but while risk reduction makes sense for many pension schemes, it’s essential for sponsors and trustees to be clear about what they are trying to achieve."

Ward added that with the increasing range of risk transfer options on the market trustees needed to set clear objectives in terms of risk reduction and the price they are willing to pay for it in order to avoid errors.

He said: "Investment markets, especially credit spreads, continue to be volatile. Equities have fallen and it has become more expensive to hedge inflation.

"The credit crunch is also affecting providers’ backers – often banks, insurers, private equity firms and hedge funds – and their margins are already low due to competition. We are now seeing signs of upwards movement in providers’ prices and they are certainly becoming more selective in deciding whether to quote."

Ward said it made sense to maintain some degree of pension risk – and said longevity-only products could be a solution for some schemes.

He explained: "While longevity-only deals have not made headlines so far, in one case Mercer recently saw a staggering 14 players jostling for a client’s business, so schemes should not dismiss this opportunity out of hand."