Scheme buy-ins at best price since 2008 – LCP

UK - Strong asset gains and the closure of defined benefit schemes have made pensioner buy-in prices their most attractive since 2008, according to LCP research.

The consultant's pension buyouts report 2011 found pensioner buyout transactions typically cost 0% to 5% above the funding reserve, compared to a typical 25% premium for buying out non-pensioners.

It said the continuing closure of DB schemes and strong asset gains since 2009 have improved affordability of buy-ins making them likely to remain the most common de-risking option looking ahead.

LCP said the number of pension plans closed to future accrual jumped from 7% to 17% during 2010, while overall more than 15% of final salary schemes in the UK are now closed to future accrual.

LCP partner Clive Wellsteed (pictured) said: "Trustees doing valuations and agreeing cash contributions are saying for a small premium above what trustees are funding for you can get attractive risk reduction by carrying out a pensioner buy-in contract."

He explained the favourable equity market has meant the overall level of deficit in the average scheme has fallen making it an easier decision to carry out a buy-in.

"Schemes had valuations and agreed contribution plans in 2009 and given the asset experience has since been good the value of the contributions in a typical recovery plan quite often exceeds the level of deficit at the current time," he added.

Wellsteed said a change in trustee attitude had also driven the trend as most are now familiar with the concept, as would the extension of insurance rules under Solvency II to pension plans.

The report also found to date the pensioner buy-in/buyout market has reached nearly £30bn ($49bn) of transactions, including ten FTSE100 schemes which represent £7bn.

Last year, total business volumes totalled £8.3bn - the highest annual sum so far. This was significantly driven by the smaller deals as more than 90% of transactions in 2010 were under £50m.

However, just £0.3bn was written in Q1 of this year but Q2 looks busier with £1bn having executed to date.

The quiet first quarter was put down to "unusual" market conditions of summer last year. In particular, the gilts and swaps market being out of sync with each other because of the uncertainty of the new government's ability to get on top of the budget deficit made the pricing of buy-in and buyout deals look unattractive.

Wellsteed predicted some £1.5bn will be written in Q2 of this year, particularly with two longevity swap deals close to transacting.

In terms of longevity swaps, only two deals were written last year - the £3bn BMW deal and as an integral part of BA's £1.3bn synthetic buy-in.

LCP said the lull in this market was because to date they are only suitable for a minority of pension schemes, are sophisticated to execute, can be difficult to demonstrate value for money, and often need a provider to put in place reinsurance arrangements.

Elsewhere, LCP observed the spread of business between the insurers during 2010 was more distributed than ever before, with more than £700m business written by five insurers.

However, the flow of transactions continues to be irregular at the larger bespoke end with Rothesay Life and Prudential having written just one, albeit very large, transaction each last year - BA (£1.3bn) and GSK (£900m) respectively.

In terms of the market share last year, Rothesay Life's one large deal claimed 25.9%, followed by Prudential and Legal & General who both claimed 17.1%, then Aviva with 16.6%, Pension Insurance Corporation with 13.7%, MetLife 6.9%, Lucida 1.9%, while Aegon and Alico both had 0.4%.

Looking ahead, LCP predicted a time "not that far away" when buying out schemes in full could be standard and accepted practice for companies with adequate funds.

The ten FTSE100 company deals to date

Smiths Group £250m
Friends Provident £360m
Lonmin (buyout) under £100m
Cable & Wireless £1.05bn
RSA Insurance £1.9bn
Cadbury £500m
Liberty International (buyout) £60m
British Airways £1.3bn
Next £125m
GlaxoSmithKline £900m.