UK - Estimates of the total size of the bulk annuity buyout market for pension funds may have been overvalued by as much as £7bn (US$12.5bn), actuaries Punter Southall have suggested.
Richard Jones, principal, Punter Southall Transaction Services, said: "We think that some people in the buy-out market are being fairly optimistic and over-stating the extent of the growth in the market by suggesting that the market will reach levels of £10-15 billion over 2008.
"With the exception of the Cable & Wireless deal there has been relatively little business written over the summer months. Since the market has written annuities worth less than £6bn for the year to date, including yesterday's deal, we expect the market will struggle to break the £10bn barrier."
Jones said the figure may have been based on the amount of annuity deals quoted, which would be significantly higher than the amount of business finally signed, as it was not uncommon or unexpected for pension schemes to 'shop around' the various providers when looking for a quote.
Also, the value of deals signed has been inflated by a small number of bulk annuity purchases at the top end of the market and suggestions of market stimulation by discounting prices to help the buy-out option breakthrough into the mainstream.
Yesterday, Global Pensions reported the first billion pound bulk annuity deal, signed between the Cable & Wireless Superannuation Fund (CWSF) and Prudential (www.globalpensions.com; 3 September 2008) where Steven Haasz, managing director wholesale, Prudential, said aggressive market pricing was a potentially unsustainable model.
Punter Southall agreed a discounting model was unsustainable and said clients had reported rising prices for quotes over the last few months, making buy-out options less affordable and less attractive.
Jones added: "Our analysis of the market over recent months suggests that buy-out prices are now increasing, as this window of opportunity is closing. We think most pension schemes will now struggle to get a 'discount' in their buy-out quote."
In a statement to Global Pensions, buyout firm Paternoster commented: "Prices in early 2008 were influenced by this year's new entrants seeking to get a foothold in the market.
"The trend is reversing as they have written business. At the beginning of this year, we forecast that the market for 2008 might be £10-£12bn and we still think that this will be the case."
The firm agreed the top end of the scale for completed deals would be dependent on the number of large deals of each in the region of £1bn which it said it believed "will be ready to transact before the end of the year".
It added: "A number of transactions have been agreed over the summer with both Paternoster and other insurers which have not yet been announced."
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