Buyouts booming

De-risking in all shapes and forms has been the zeitgeist of the pensions industry for the past couple of years. Within this, the hot products have been buy-ins and buyouts, with £5.2bn of deals in 2010 – £1.6bn of that taken in Q4 alone, Hymans Robertson's Managing Pension Scheme Risk 2010 report found.

Having conducted £897.5m of business last year (a 7% increase on 2009's £826m total) and with £360m of that total just in Q4, Legal & General certainly noticed a flurry of interest for these deals. However, while buy-ins may be greater in value (the Hymans report places the value of buy-ins last year at around £4.3bn versus £900m of buyouts), Legal & General found that it is the buyout market that is experiencing a surge.

Legal & General's head of business development for the BPA business, Tom Ground says: "Of the 115 deals we completed last year, 99 were buyouts representing £467m of the total £897m of new business we received. So based on the Hymans Robertson survey, we have approximately a 50% share of the buyout market."

This places Legal & General in a good position to understand why increasing numbers of pension schemes are turning to buyouts. According to Ground, there are two main reasons that account for this growth.

"Firstly, there are a number of foreign multi-nationals just wanting shot of their pension scheme. They perceive that there is no advantage in continuing to run the scheme and thanks to improvements in funding levels they can now afford to consider buyout as an option. We are quoting on six or seven such cases at the moment.

"Also, there are a lot of cases – and more coming shortly – of buyouts that are insolvent wind-ups. These schemes have too much funding to be in the PPF and enough money to do a buyout of PPF style benefit," Ground explains.

The growth in buyouts is predicted to continue in 2011. However, for some schemes the only way they are able to buyout is if the data and regulatory risk is also passed to the insurer. Legal & General can offer these package solutions dependent on scheme circumstances.

A continuing improvement in affordability is expected to contribute to increased buyout activity in 2011. The City UK's Pensions Market report found the real return on UK pension funds to be 7.6% in 2010 – and a 15.7% return in 2009 – largely underpinned by the recovery in the equity markets and alternative asset classes such as hedge funds. The PPF has highlighted that the financial position of DB schemes has improved dramatically over the past two years, with the aggregate deficit of £201bn recorded in March 2009, eliminated by March 2010, when there was a surplus of £38bn.

Despite this buyout growth, transaction closure rates do differ according to scheme size. Legal & General's research found in 2010 that 31% of BPA quotes for 0-£10m sized schemes led to a transaction, the closure rate increasing to 47% for those schemes of £10m-£100m. However, the number of schemes over £100m completing transactions fell to one in five, and to just 17% for those schemes over £500m.

This tail off in closures is attributed to the increased options and complexity that the larger schemes need to consider. Including security structures and more strict requirements can make the pricing unappealing. These schemes need to be clear on what they want to achieve and review and price those basic requirements then consider the cost benefits of the additional options available, Ground explains.

As understanding improves, Legal & General predicts a greater percentage of larger schemes will complete a deal, and so contribute to the expected overall growth in the buyout market for 2011. Ground says: "For those schemes interested in a buyout but who have not yet made the call to action, the time is now right to do so. The fundamentals for a buyout transaction are improving and as the process takes a while (on average several months) to complete, now is a good time for trustees and corporates to identify an adviser to start considering their buyout options."

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