Pension buy outs hot up?

As Emap off-loads two of its defined benefit plans, does this mark a new trend among larger employers, asks David Woods.

Emap’s decision to off-load its two largest defined pension (DB) schemes, with combined assets of £170m, to insurance company Paternoster has not only removed its DB liabilities from the balance sheet but also one of the many hurdles in the way of its break-up strategy.

Advised by Mercer, Emap made a final cash contribution into these schemes of approximately £40m, a figure that is higher than the balance sheet liability (on an IAS 19 basis) of £8m as at 30 September 2007, but significantly less than the liability calculated on a buyout basis at the last actuarial valuations of £77m.

The buyout deal, which secures employees’ benefits in full, is significant as Emap is a large company and solvent. In the past, buy outs have been mainly the preserve of small or virtually insolvent companies. Earlier this year, another large company, Rank Group, said that it was also considering selling its pensions fund worth £700m, causing speculation that the buyout market was hotting up.

David Marlow, director at benefits consultancy Alexander Forbes, said: “It is fair to say that this [news about Emap] will increase the momentum of a trend that has been going on for a number of years now. Companies [with] DB liabilities run the risk that they might become uncompetitive because any debts are now shown on their balance sheets and could have an inhibiting effect on their business.”

However, not everyone is convinced that the buyout market is about to take off. Robert Meek, principal consultant at Hewitt Associates, said: “This [Emap] deal indicates that things are continuing along the same direction but I don’t think that this will change the market significantly.”

Despite increased competition within the insurance market, with Goldman Sachs and Paternoster joining incumbents Legal & General and Prudential, the buyout route is not affordable for everyone. Only last month, Aon Consulting published a report which showed that over the third quarter of 2007, there had been a reduction in the volume of buyout cases and the total value of businesses being placed, compared to the previous two quarters.

However, Paul Belok, principal and actuary at Aon Consulting, said: “Of the schemes that have obtained buyout quotations during the quarter, it would only need 5% to buy out in the next 12 months for the market to start showing some growth. Some companies have concluded the cost of the buy out is still too high for them to proceed, but for others it is starting to be viewed as a price worth paying, especially if the pension scheme is a barrier to corporate activity.”

Employers looking to reduce their risks around DB deficits should consider all their options. Marlow said: “There are alternatives to a buy out that should be considered before jumping straight in. For a lot of companies whose schemes are in deficit, the buyout costs may be horrendous.”