Personal Pension  

Pension buy-ins and buy outs at record levels

De-risking is becoming de rigeur for the trustees of defined benefit pension schemes – 2013 was a record year for pension insurance buyouts and buy-ins, with approximately £7.5bn of liabilities insured. In addition, a further £9bn or so of longevity swaps were completed in the year.

The development of the sector, which was up about 50 per cent on the previous year, was facilitated in large part by the growing economic recovery and the trend towards matching assets and liabilities. As gilt yields are the benchmark by which pension funds set their liabilities, a rise in the rate of return consequently brings down those liabilities, improving affordability of pension insurance for many pension schemes and their corporate sponsors. But yields have been volatile.

This development continued into 2014, with the market reaching nearly £7bn of buyouts and buy-ins in the first six months of the year – another record. Notably, during this period, the two largest transactions to date were completed, for ICI, which insured £3.6bn of liabilities, and for oil company Total, which insured £1.6bn of liabilities. We also saw the emergence of super large longevity transactions, including one by BT to hedge £16bn of longevity exposure, and a £5bn transaction by Aviva. Large figures perhaps, but small when you consider that there are approximately £1.8 trillion of DB liabilities in corporate DB schemes in the UK alone.

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In the UK, this sector comprises the provision of wholesale insurance annuity products to defined benefit pension schemes. This takes broadly two forms. The first, a pension insurance buy-in, is a single annuity policy taken out by the trustees of the scheme in respect of some or all of its members and dependent beneficiaries in order to cover some or all of their benefit entitlements. Under this type of transaction, the trust structure remains in place and the sponsor is ultimately responsible for supporting the uninsured liabilities. This policy is typically taken out by trustees as a part of their investment strategy.

On the other hand, a typical pension insurance buyout will see all the liabilities of a pension scheme passed over to a specialist insurance company for an agreed amount of assets – usually requiring additional support from the sponsoring company. In this type of transaction, the pension trust is wound up, the scheme members become individual annuitants of the insurer and the former sponsoring company is divested of all further responsibility. This last point is important because it is often the case that these types of transactions have been driven by the company, perhaps in order to tidy up the group structure ahead of a corporate transaction. There are many examples – FTSE 100 companies included – of announcements regarding pension insurance buyouts being followed in the subsequent days or weeks by some sort of corporate action, such as a demerger, or rationalisation of subsidiaries.

There are several factors driving the growing numbers of pension insurance buyouts and buy-ins. However, the primary reason is perhaps because as successive pieces of legislation have hardened the pension commitment to a firm promise, it has become increasingly more expensive for the sponsor to support the scheme. As a consequence, employers have sought to reduce their financial exposure and ultimately this means closing the scheme.