Companies look to insurance buyouts as the next phase of pension plans
8 June 2011

• A competitive market for UK defined benefit pension plans to transfer risk to insurers reaches its fifth anniversary and the market's prospects have never looked stronger.
• Current conditions are favourable for pension plans looking to reduce risk in this way.  Affordability for insurance buy-ins is at its best level since 2008 and competition between providers is strong - five insurers each wrote business exceeding £700m in 2010.
• Momentum is being generated by a jump in the number of pension plans closed to future accrual - from 7% to 17% during 2010.   The potential threat of insurance rules under Solvency II being extended to pension plans will only accelerate the transition of pension plans to insurers.
• Pensioner only "buy-ins" remain the most well-established insurance solution and given their affordability will continue to account for the lion's share of transactions until pension plan deficit recover more fully.
• As well as buy-ins, PLC decision makers are increasingly considering writing the cheque to fully transfer all pension risks to an insurer.  The challenge for them is if and when to take this step, and to demonstrate value to shareholders - both from the reduction in financial risks and increased business flexibility.
• The timing conundrum could be resolved by relatively modest improvements in investment markets - a 10% movement in both the equity and index-linked gilt markets would reduce the size of the typical cheque by 25%.

Clive Wellsteed, Partner at LCP, said: "We now have all the right ingredients for the market to move up a gear. Affordability is at its best level since 2008 and competition between providers is strong.  With nearly 1 in 5 defined benefit pension plans now closed to future accrual, the insurance market offers a real solution for plans looking to reduce risk and safeguard member security.  At the same time rising funding levels are shrinking the gap to full buyout and it's now looking increasingly attractive for companies to write that cheque and buy out their pension plans in full."

The LCP Pensions Buyout 2011 report also contains a step-by-step guide for trustees to get transaction-ready, which recommends that trustees adopt a trigger-based approach. This is a simple but effective mechanism which will allow trustees to lock-in to pricing when market conditions are most favourable.

Clive Wellsteed added: "The UK is leading the way in pensions de-risking with other countries such as The Netherlands and Ireland now following suit."

The report also includes:

• A full review of the buyout market to date
• Case studies of the two large buy-in transactions of 2010 (British Airways (£1.3bn) and GlaxoSmithKline (£900m))
• An analysis of buyout opportunities outside the UK.