UK - The net cost of buyout for pension schemes which remained heavily exposed to equities became 13% more expensive during 2008, latest figures by Paternoster reveal.
However, it also showed schemes which de-risked by holding high-quality gilts and bonds saw the affordability of buyout improve by 2% over the quarter and by 10% over 2008 as a whole.
Paternoster chief executive Mark Wood said: "In October and November we saw a major readjustment in inflation expectations which led to a significant reduction in the cost of defined benefit pension scheme buyout as the majority of liabilities are inflation linked.
"Subsequently, very strong performance in the government bond markets (particularly in November and December) drove risk free rates down, causing significant increases in the cost of buyout towards the end of the year."
Wood also pointed out overall market volatility in the fourth quarter of 2008 - created by uncertainty about the likely level of future corporate bond defaults - resulted in a range of prices being quoted by individual insurers, as they to varying degrees re-evaluated their reserving levels.
He explained: 'Since the beginning of this year the large number of downgrades has complicated pricing for the bulk annuity insurers. In particular, the yield available on AA bonds (as evidenced by the iBoxx index), dropped markedly on 2 January as many high-yielding financial stocks were downgraded. Insurers now have to choose between increasing prices to maintain portfolio credit quality or letting the credit quality drift with the related risk of worsening future default experience.
"Although uncertainty has continued during January, spreads on good quality, particularly non-financial corporate bonds, have narrowed in recent weeks and if this continues this will help to progressively stabilise pricing. For those schemes that have already followed a de-risking strategy, insuring a scheme through buyout or buy-in will offer additional security to scheme members at an increasingly affordable premium."
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