After a long period of speculation, could it be that the ball is finally rolling for the much-hyped buyout market?
2007 witnessed further rapid evolution of an already much changed industry, with new players moving away from the insurance model set by more established players like Prudential and L&G, and even Paternoster and Synesis Life, and looking to offer non-insurancebased - and therefore theoretically more affordable - solutions to pension funds.
Two notable examples are Occupational Pension Trust (OPT), created as a national pension scheme confederation with member funds continuing to run under their existing arrangements with oversight from the OPT's independent trustees, and PensionsFirst, which offers pension funds scheme-specific longevity solutions.
Also sidestepping the insurance route have been Pension Corporation (through its Pension Corporation Investments (PCI) subsidiary) and Citigroup, which with the Thorn, Threshers, telent (PCI) and Thomson Regional Newspaper deals (Citi) have taken on pension funds through the acquisition of the sponsoring companies.
However, these developments have not been without controversy, as by acquiring the sponsoring company, PCI and Citi have ensured they avoid the strict investment regulations governing insurance companies. This allows them to undercut their insurance company rivals, but - say the insurance firms - also potentially leaves the pension fund without an adequate level of protection.
Unease over the level of security offered by these deals was evidenced by the protracted stopstarts of Pension Corporation's telent deal, which involved opposition from the workers' union Unite and intervention from the Pension Regulator, which appointed three independent trustees to the pension scheme.
Said John Broome Saunders, actuarial director at BDO Stoy Hayward: "The mismatch in regulation is clearly something that the new players [like PCI and Citi] in the buyout market are making use of.
"There has got to be a question mark as to what extent that kind of regulatory mismatch is allowed to continue."
John Belgrove, senior investment consultant at Hewitt, believed longevity was the greatest issue causing sponsors to worry about the obligations they were on the hook for.
Belgrove said: "The increase in focus is because other risks can be handled, longevity risk is difficult to predict or control."
Paul Gibney, investment partner, Lane Clark and Peacock (LC&P), also noted longevity was a big issue for pension funds, adding that, other than through a buyout, it was harder to address as he believed the tools were not as well developed as for investment issues.
Mortality improvement projections had not been that realistic, said Gibney, and it was difficult for pension funds to estimate where longevity assumptions would go to.
"There have been attempts by investment banks that try and reduce or mitigate the risks that mortality poses to pension funds, but to date there hasn't been much success," said Gibney.
He believed to address mortality, pension funds should look to a full or partial buyout and he pointed out the cost of this had reduced due to increased competition and innovative thinking in that area.
Broome Saunders said he expected the increase in the take-up of buyouts to continue: "I think activity will increase because of better funding levels and better investment returns, which means the premium you pay for [a] buyout is a bit more manageable."
However, for Marcus Whitehead, a partner at Barnett Waddingham, the expense to pension funds was still too high.
"I think a lot of funds would love to buy out if they had the money - it is logical for pension funds that are closed to future accrual - but the margins are significantly above the margins a scheme would have," he said.
He added that buyouts were one of the things being discussed as pension funds became better funded.
"The bottom line is there are not many schemes or employers that have the money to buy out," said Whitehead.
Con Keating, analyst at pension fund insurance vehicle Brighton Rock Insurance, reiterated that persistent increases in life expectancy had taken the industry by surprise, but stressed the situation was manageable with top ups by sponsors.
"Very few companies have problems paying pensions out of free cash flows if they are trading and they are solvent, the real problems don't actually occur until the company goes bust," said Keating
Keating added that by putting extra contributions into pension funds to bring them to greater than 100% funded, companie s were "shooting themselves in the head", because this course of action would only make the company more likely to fail.
"You cannot free up assets from a pension fund in the UK until you are funded above the level of [the] full bulk annuity buyout price," said Keating. "Trapped surplus, above 100% but below annuity cost, is a problem."
According to Keating, the future of pensions was insurance.
"There are many things markets cannot do [and] one is promise to pay pensions in the future - this is a job for institutions like pension funds and insurance companies.
"The market solutions that are around aren't really market solutions at all. And when you look closely at them, the companies at their heart just don't stack up as institutions," said Keating.
John Belgrove, senior investment consultant at Hewitt, said typically schemes looking to buy out were well funded with low levels of paternalism.
"Most pension funds do not have the financial capability to buy out, even with increased close-out players, being fully funded on an accounting measurement is short of fully funded on an insurance measurement," said Belgrove.
However, he noted a buyout did not have to happen all in one go. The choices for pension funds include phasing of the buyout and slicing and dicing members to just buy out one section, such as deferred or pensioner members.
David McCourt, policy adviser: investment and governance at the UK's National Association of Pension Funds (NAPF), remained unconvinced buyouts were the way forward. He said the deals that were being completed were still on a small scale.
"The small funds are business for the new players in the market, but if there is a range of options for finance directors of boards and trustees to discuss, they may say they will run the scheme they are committed to funding," said McCourt.
McCourt also added it could take a long time for a deal to go through.
"If trustees can drive a hard bargain in terms of cost, there might be a move to get into these areas. I think it will grow, but I think it will be a slow burner, there will not be a huge uptake," he stated.
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