LCP predicted the £4 billion of buyout business this year would be significantly down from the £7.9 billion of business in 2008, but would still exceed the £2.9 billion reported in 2007. In the first quarter this year, £900 million worth of deals were closed.
The business volumes cover bulk purchase annuities (BPA) transactions in the form of buyouts, where a pension plan's assets and liabilities are transferred to an insurance company, ending the pension fund's obligations to provide benefits. They also include buy-ins, where an insurance policy is purchased to cover a portion of the liabilities. In addition, total volumes incorporate pension fund longevity swap transactions.
"After the explosive growth in pension buyouts last year, the financial crisis has slammed on the brakes for now. Insurers and pension schemes have taken a step back as they wait to see what impact the crisis will have," commented Charlie Finch, a partner in LCP's buyout practice in London.
The report highlights several reasons for the slowdown in BPA business this year. Following the deterioration in the global economy since the collapse of Lehman Brothers in September 2008, the report said, pension fund trustees have become more concerned about the financial health of insurance companies, leading them to hold off transacting a risk-transfer deal until the economy stabilises. Another reason cited was that prices for BPA deals have risen since September, making them less affordable for some pension schemes. The increase in BPA prices was because of increased illiquidity in pension funds and insurers' key investment markets, and because of insurers' more cautious pricing and reserving assumptions, such as increased assumed default rates on corporate bonds backing their annuity portfolios. LCP expects these obstacles to further growth of the BPA market to be temporary.
"It would be wrong to think that the markets are dead. Fundamentally, there is no let-up in demand for eliminating pension risk. For many pension schemes, it is not a question of whether they will buy out, but rather a question of when," stated Finch.
LCP anticipates the BPA market will bounce back to volumes of £8 billion in 2010, with potentially £12 billion of deals executed if there is significant improvement in the UK economy.
"As financial markets improve, insurers will be able to get more access to capital to write more business. In addition, once pension funds' sponsoring companies have dealt with the main business issues relating to the worst of the financial crisis, we expect more of them to look at de-risking their pension funds with a BPA deal," Richard Murphy, a Winchester-based partner at LCP, said.