Quarterly pensions buyout market soars above 2 billion

The insurance buyout market for defined benefit (DB) pension schemes has seen a second successive strong quarter, according to Aon Consulting, a leading pension, benefits and HR consulting firm. The total value of the market reached 2.2 billion in the first quarter of 2008, 350 million more than the record-breaking fourth quarter of 2007.

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In its latest quarterly buyout market survey, Aonís research shows that over the first quarter of 2008 there was significant growth in the value of business placed. This included high profile cases such as TI, Morgan Crucible, Powell Duffryn and the largest deal so far this year, Rank (700 million).

Aonís quarterly buyout market survey, based on information provided directly from the leading players in the buyout market, analyses the volume of cases being placed and also assesses the number of quotations being requested, in order to get a realistic insight into the state of the buyout market.

In quarter one of 2008, the number of cases placed (87) was up on the last quarter of 2007 (75), and the total value of business placed (2.2 billion) was over 350 million more than the record-breaking fourth quarter of 2007.

The average value per scheme placed was similar to last quarter, at approximately 25 million per scheme. This represents a significant increase when compared with the average of around 5 million for prior quarters.

Prospects for the market
The number of quotations being provided, an indication of likely future business levels in the buyout market, remains at historically high levels. The first quarter of 2008 saw 401 cases quoted for (compared to 432 in fourth quarter 2007) with the total value of these schemes being 46.1 billion (compared to 40.9 billion in fourth quarter 2007).

Commenting on the latest data, Paul Belok, principal & actuary at Aon Consulting, said: ìFor the bulk annuity market, the start of 2008 was even stronger than the end of 2007, with a number of cases in excess of 100 million again being the engine for growth. If current levels of activity continue and the conversion rate of quotes to placements is maintained then 2008 could see the market reach around 10 billion. This would represent 250 per cent growth compared to 2007 (2.8 billion placed), but it would still represent less than 1 per cent of all DB scheme liabilities in the UK.

ìWhilst Legal & General and Paternoster continue to be major players in the market, the first quarter of 2008 also saw a host of new providers writing their first cases: Rothesay Life (the Goldman Sachs subsidiary) and Lucida both landed high profile schemes, and MetLife also got off the blocks.

ìA key driver for the interest being shown in bulk annuities has been the significant reduction in prices in recent months, a result of the highly competitive market and the increase in long-dated corporate bond yields ñ this is one area where the credit crunch has actually been beneficial.

ìA number of pension schemes and employers have recognised that the timing is attractive for either a full buyout or (increasingly commonly) a partial buyout, particularly of liabilities relating to pensioners. The pipeline has remained extremely strong since the end of the quarter and Aon is currently advising a number of pension schemes who are actively exploring the market.

ìHowever, there are reasons to believe that the current window of opportunity to remove investment and longevity risk from pension schemes at an attractive price will not last indefinitely. The scramble for business among bulk annuity providers may not be quite so desperate in future as volumes increase and capacity issues potentially resurface, and signs are also emerging of credit spreads starting to close.

ìNevertheless, there is significant demand at current prices and we expect that many of the cases that are actively investigating the market will transact, which will help sustain levels of business over the next few months.î