Two sides to the buy-out market have been presented this week, with Hymans Robertson presenting a positive reflection of the £0.9bn of deals, while Aon Consulting warns that the market is feeling the strain with deals down by 50 per cent on the previous quarter.

Aon said its Q1 buy-out survey, based on information gained from leading insurers, showed that the value of business placed in Q1 2009 was £888 million, a huge drop from Q4 2008's £1,832 million. However, the number of cases placed stood at 44, compared to 43 in the previous, more successful quarter.

Hymans Robertson reported that Legal and General recorded the highest total deals with £485 million for the quarter, although Pension Insurance Corporation completed the biggest single deal at £230 million - a buy-out deal with the Leyland DAF pension scheme.

James Mullins, senior actuarial consultant at Hymans Robertson, said: "After the events of the last nine months, we expect pension scheme trustees engaged in buy-in negotiations with insurers to step up demands for additional security, in the form of ring-fenced assets. This is when insurers agree to hold the money received from the pension scheme (the buy-in price) as a separately identifiable pool of assets in the name of the trustees. Ring-fenced assets are then available to the pension scheme should the insurer get into financial difficulties. When assets are not ring-fenced, trustees are forced to compete with other creditors over the remaining reserves held by the insurer. Indeed, we are now seeing many insurers automatically offer this facility to ring-fence or 'collateralise' assets as part of buy-in deals - a change of approach over the last year."

The independent benefits and pensions consultancy added that pension schemes are increasingly interested in "DIY buy-ins", where a scheme combines Liability Driven Investment (LDI) with a longevity hedge. Longevity hedge quotations have also been issued by non-insurance companies such as Credit Suisse and JP Morgan.

Aon Consulting principal and actuary, Paul Belok, added: "Although the headline numbers do not appear to be very strong, the bulk annuity market has in fact been relatively resilient given exceptional market conditions."

He did, however, take a more positive stance when considering the outlook for the buy-out market over the coming months. "Whilst we have seen a tailing off from the extremely high levels of interest that we saw last year, those cases that are continuing to investigate the market are doing so seriously. These schemes tend to have a relatively cautious investment policy and are often reasonably well funded - other situations can be linked to M&A activity, a large (often foreign) parent seeking to close out its defined benefit pensions exposure in a subsidiary, or an insolvency situation."

He concluded: "Our view continues to be that the insured bulk annuity market will grow in the long-term, as it remains the only realistic option for full settlement of defined benefit pension schemes for both employers and trustees. Results from recent quarters highlight that this growth is not necessarily going to be steady or consistent, however, and we can expect that the pace and timing of the development of the market will continue to be affected by broader economic and other factors."

- Pensions Age May 2009

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