UK - Insurers are being forced to limit the size of bulk annuity buyouts because the corporate bond market is saturated by the volume of scheme wind-ups.
Legal & General – the biggest provider of annuities to pension funds – has been forced to impose a £500m limit on the size of scheme it will take on in wind-up.
This limit would prevent the UK’s 250 biggest schemes from carrying out a bulk purchase annuity buyout.
L&G corporate annuities director Dennis Canham said that any scheme valued at more than £500m could not be wound-up with corporate bonds alone and that alternative measures, such as phased buyouts, would have to be used.
He said that capacity in the corporate bonds market was being eroded by the number of schemes requiring deferred annuities.
Prudential business development manager for bulk annuities Ian Aley agreed that the bonds market was reaching saturation point.
“There’s a finite market in fixed interest bonds and a massive potential for schemes wishing to wind-up or manage their risk on an ongoing arrangement.
“The reality is there were a high number of these schemes to buy out the annuities at the same time, the investment market wouldn’t be able to support it.”
HighamNobbs Consulting partner Russell Agius said he was aware of more and more pension schemes finding it difficult to buy out their liabilities and urged the government to tackle the issue.
“This highlights the need for the department for work and pensions to allow trustees to seek alternatives such as paying transfer values to money purchase arrangements without member consent.”
This approach, he added, would free up capacity in the corporate bond market, as well as dramatically increasing the speed of wind-up.
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