Pensions buyout market struggling to take off

Shows new research from Aon Consulting

Despite evidence of large potential, the average value of buyout cases, number of cases placed and total value of business placed are all down in quarter 3 compared to quarters 1 & 2.

The insurance buyout market for defined benefit pension schemes is struggling to take off, according to Aon Consulting, a leading pension, benefits and HR consulting firm, in the second of its quarterly buyout market surveys.

The new research shows that over the third quarter of 2007, there has been a reduction in the volume of cases and the total value of business being placed compared to quarters 1 & 2. In addition, those buyouts that have gone ahead have on average been smaller in value. However, there are also signs that the market has large potential to grow if it can convert quotations into real cases.

Aon Consultingís quarterly buyout market survey, based on information provided directly from the leading players in the buyout market, analyses the volume of cases being placed and also assesses the number of quotations being requested, providing a realistic insight into the state of the buyout market.

Both the number of cases placed (60, compared to 75 in quarter 2 and 50 in quarter 1) and the total value of business placed (239 million) were down compared to previous quarters[1], as illustrated in the graph below.

Graph 1: Number and value of business cases placed



Business placed relates to cases where the initial transfer of assets to the insurer has occurred

The average value per scheme placed was also slightly down at 4 million. Furthermore, there is still very little take-up of the additional flexibility that the new providers have championed in terms of partial or phased buyouts, or buyouts on a risk-share basis ñ only two of the 60 cases were anything other than full buyout.

However, the future prospects for the industry look better as the number of quotations being provided - an indication of likely future business levels in the buyout market - show positive signs. The third quarter of 2007 saw a significant pick up in both the number of cases quoted for (330) and in particular the total value of these schemes (37.8 billion).

Graph 2: Number and value of cases quoted for



Figures will include duplication relating to schemes which approached more than one insurer

All of the insurers have reported an increase (in some cases very significant) in the value of the quotations they have handled. It is also very apparent that the average value of each quotation has increased, and at 114 million is much higher than the average value of cases currently being placed. Although the picture is a little distorted by some of the insurers having quoted on a few extremely large cases, the increase in average quotation size is in evidence across all the insurers.

Paul Belok, principal & actuary at Aon Consulting, said:

ìThe third quarter of 2007 was a fascinating one for the insured buyout market. The levels of business actually placed were disappointing, which is perhaps surprising given the level of hype that has been created.

ìHowever, there were some mitigating reasons for this, in particular: announcements regarding acquisitions by Pension Corporation and Citigroup, suggesting that it may be possible to offload pension liabilities ìon the cheapî ñ this could have given some employers who had been considering a buyout pause for thought; and the Financial Assistance Scheme imposing a buyout moratorium on schemes, which will also have stymied some cases which were about to buy out. Nevertheless, there is no hiding the fact that the quarterís results will not be what those in the market will have wanted to see.

ìGoing forward the big question is whether the insurers can now convert the massive pipeline of cases that has been built up. Of the schemes that have obtained buyout quotations during the quarter, it would only need about 5% to buy out in the next 12 months for the market to start showing some growth.

ìOur experience is that some companies have concluded that the cost of buyout is still too high for them to proceed, but for others it is starting to be viewed as a price worth paying, especially if the pension scheme is a barrier to corporate activity. Since the end of the quarter there has been at least one significant buyout that has been announced (Emap, worth c170 million) - could this be a sign that at last the market is about to come to life?î

[1] The value of business placed for Q1 and Q2 2007 has been restated compared to the previous survey following clarification of the response received from one insurer.