Pension buyout market will halve

The pension buyout market will halve as the full force of the financial crisis hits home, according to a report published by Lane Clark & Peacock (LCP).

It said the market for transferring pension scheme risk to an insurance company will fall to £4 billion this year, half of the £7.9 billion of buyout business written in 2008 but still exceeding the £2.9 billion written in 2007.

As the buyout market drops, LCP predicts growth in the longevity protection market, which transfers the financial risk that members live longer than expected. 

Charlie Finch, a partner in LCP’s buyout market, said: “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.

“The birth of the longevity protection market is well timed to help larger pension schemes take a key risk off the table with six FTSE 100 companies having already obtained longevity quotations. Competition between providers seeking to establish themselves means that many larger pension schemes can purchase longevity protection at limited additional cost relative to present funding plans.”

Finch however, said it would be wrong to think of the buyout market as 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. As a result, we expect buyout activity will pick up in the second half of the year as the financial crisis recedes. Careful preparation now will allow pension schemes to move quickly as opportunities arise,” he explained.

LCP’s report reveals that fewer than 20% of buyout quotations led to a completed deal in 2008. Furthermore, it expects this to increase towards 50% over 2009, reflecting the higher proportion of well-prepared schemes currently exploring buyout options.