Employers which are looking to de-risk pension schemes need to prepare now to avoid rising prices caused by a bottleneck in insurers’ capacity, according to Lane Clark & Peacock (LCP).
In a new report the firm of consulting actuaries said that demand for buy-ins and longevity swaps has the potential to significantly outstrip supply, prompting swift action from companies to have preparations in place for when the time comes to transact.
The LCP Pensions Buyout 2010 report predicts that the amount of new business written in 2010 will double from £7.5 billion in 2009 to £15 billion. This would take the total liabilities insured since 2007 to nearly £40 billion.
However, insurer capacity is limited so a surge in demand will drive prices significantly higher. The total value of private-sector defined benefit liabilities is over £1,000 billion, and LCP estimates that insurers will write no more than £10 billion of buy-out or buy-in business each year until prices start to rise.
The report predicts that longevity hedges will make up half the predicted £15 billion of new business, but will be restricted to the very largest schemes.
The report shows that 2010 has got off to a strong start with BMW’s £3 billion longevity swap bringing in a large majority of the £4 billion of business in the first quarter.
Clive Wellsteed, partner and head of LCP’s buyout practise, commented: “The last 18 months have demonstrated that insurers have been resilient during the worst financial crisis in memory.
“With over £1,000 billion of private sector defined benefit pension liabilities, the de-risking market is here to stay - with the advent of longevity hedging all the building blocks are now in place.
“The message to companies and pension schemes is that you do not want to be last in the queue - particularly if insurers become more selective over which schemes to focus on. Careful preparation now will allow you to move quickly and get strong engagement from insurers once the time is right.”
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