The market for transferring pension scheme risk to an insurance company will fall by half to £4bn this year because of the financial crisis according to a report by Lane Clark & Peacock LLP (LCP), leading consultant actuaries.

This will still exceed the £2.9bn written in 2007.

Charlie Finch, partner in LCP's buyout practice, said: "After the explosive growth in pension buyouts last year, the financial crisis has slammed on the brakes for now. Insurers and pension schemes have taken a step back as they wait to see what impact the crisis will have."

LCP's report reveals that fewer than 20 per cent of buy-out quotations led to a completed deal in 2008. LCP expects this to increase towards 50 per cent over 2009, reflecting the higher proportion of well-prepared schemes currently exploring buyout options.

The demand to manage risk for defined benefit pension schemes is not going to diminish even though the buyout market is off the boil for the moment. Longevity hedging transfers to the insurance company only the risk that members of the scheme will live longer than predicted, while retaining the assets of the scheme. This can be more affordable than a buy-in, and more attractive, in that counterparty risk is minimised.

Babcock International announced its longevity swap agreement in May, the first by a UK pension scheme, and LCP predicts that more will follow.

Finch added: The birth of the longevity protection market is well timed to help larger pension schemes take a key risk off the table with six FTSE 100 companies having already obtained longevity quotations. Competition between providers seeking to establish themselves means that many larger pension schemes can purchase longevity protection at limited additional cost relative to present funding plans."

Interestingly, the report follows Pension Capital Strategies' (PCS) latest Buyout Market Watch Report which shows that pension scheme buy-out prices are generally increasing for both deferred and pensioner members.

"Looking at quotations received over Q1 2009 there is evidence that, following the changes in the pricing bases, prices are generally increasing with significant volatility in the different quotations as insurers amend their pricing.

"However, the comparison between buyout prices and the pension costs shown in company accounts is distorted by a quirk of the accounting rules which means that pension liabilities on company accounts are artificially reduced at present. This makes buyout prices look more expensive than they really are. However we believe buyout prices relative to gilt yields still look attractive."

- Pensions Age June 2009

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