Increased demand for pension scheme buyouts

There has been an increase in demand for insuring the defined benefit (DB) obligations of occupational pension schemes in 2010 compared to 2009.

According to data from consultancy Mercer, £3.2 billion of business was written in the first half of 2010 compared with £3.7 billion of business written during the whole of 2009.

However, the majority of the transactions undertaken so far this year relate to small schemes, with 65% of all the transactions so far in 2010 involving a premium of less than £10 million.

Thedata also illustrates the influence large transactions currently have on the overall volume of business being transacted. Excluding the five deals in excess of £100 million – including the £1.3 billion British Airways deal – the remaining transactions have been relatively small. Around £1.1 billion of business has been written from 84 transactions, representing an average transaction size of £13 million.

According to Mercer, as business confidence and the funding position of pension schemes improves, a greater number of medium-sized schemes will look to proceed towards buy-out/buy-in or other de-risking strategies.

Stuart Faloon, head of bulk annuity broking at Mercer, said: “If the trend of the first six months continues, total business volumes of approximately £6 billion to £8 billion may be anticipated.

“The large number of small transactions is driven by companies seeing the additional cost of buyout as bearable compared to the costs of maintaining small schemes and the risks involved. Many medium-sized schemes are waiting on the sidelines for the time being.

“Given the lead times often involved in completing buyout and buy-in transactions, trustees and sponsoring employers need to start planning now if they are considering either a buyout or buy-in in 2011. Indeed, the volume of quotations being prepared by insurance companies suggests many schemes are already engaged in the process.”

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