Buyout transactions may increase this year due to improved affordability if gilt yields rise, Pension Insurance Corporation (PIC) said on the release of its Pension Risk Tracker Index results for Q4 2012.

PIC predicted that should gilt yields rise, due to shifting economic circumstances or a change in policy, pension fund liabilities would be brought down, improving affordability for buyouts.

This would be different from 2012, PIC stated, which saw buy-ins lead the pension insurance market, pegged to ultra-low gilt yields. According to PIC’s Pension Risk Tracker Index results, Q4 2012 saw interest in buy-ins rise to record levels.

According to PIC, as the Bank of England will need to issue tens of billions of pounds of new gilts this year to finance the budget deficit, possibly without the support mechanism of QE, each gilt auction will be “more of a test of the market’s view of the UK as a safe haven and growth prospects”.
It explained that if the UK’s status as a ‘safe haven’ weakens as a result of poor GDP growth prospects and a possible credit downgrade, yields may rise “further and faster than anticipated”.

PIC co-head of business origination David Collinson said: “Should bond yields rise over the next few months, some pension funds may find themselves in a position to de-risk and they should consider acting on this opportunity whilst they have the chance. Windows of this nature can be short-lived and as we have seen, may not come around again very quickly. Trustees should be laying the groundwork for their plans well in advance.”

PIC’s findings showed that the pension insurance market had a strong start to the year with more than 50 schemes with liabilities in excess of £20bn actively looking at a pension insurance transaction.

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