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Buyout activity accelerates in second and third quarters as de-risking continues

After a slow start in quarter one, buyout activity picked up during the second and third quarters of 2012, says JLT Pension Capital (JLT PCS), a specialist in corporate consulting and pension scheme de-risking.

Over GBP900m of buyout deals were transacted over Q3 2012, a total of GBP2.5bn thus far this year.

Insurers remain positive that a healthy number of transactions will be completed in 2012, particularly at the small and medium end of the market.

Prices have remained relatively stable throughout 2012, though bulk annuity prices are higher than 12 months ago, mainly due to falling bond yields.

Pensioner buy-ins remain the most popular contracts because of their affordability relative to full buyouts
The appetite for de-risking solutions remains strong both for sponsors and trustees, as uncertain economic and financial conditions result in pension schemes being seen increasingly as an unaffordable and potentially destabilising risk, says JLT PCS.

During the third quarter of 2012 over GBP900m of buyout business was transacted, leading to total business written during the year of GBP2.5bn. The larger deals were predominantly pensioner buy-ins, with the largest being the GBP320m Cookson deal with Pension Insurance Corporation.

JLT PCS expects a healthy number of transactions to be completed during the remainder of 2012, particularly at the small and medium end of the market as insurers continue to offer flexible contract structures and payment terms. However, 2012 business levels look set to be lower than previous years, based on business written during the first three quarters of the year.

Continued concerns over the debt crisis in the Eurozone mean that conditions will remain difficult and prices are unlikely to soften any time soon. As a result, buyouts may remain unaffordable for many schemes, especially if additional cash is required from sponsors, who may be unwilling to release capital in the current economic climate.

Martyn Phillips, director, head of buyout consulting at JLT Pension Capital Strategies, commented: “Whilst low yields have led to higher absolute prices compared to 12 months ago, schemes with significant gilt holdings will have seen significant growth in assets, so that the affordability of the buyout route may actually have increased over the period. These well matched schemes are expected to continue to consider opportunities to de-risk via the purchase of a bulk annuity.  

“We anticipate the demand for bulk annuities to increase following the European Commission’s Quantitative Impact Study on its plans to revise the Institutions for Occupational Retirement Provision (IORP) (pension fund) directive, the results of which are due by spring 2013. This is because the QIS could include Solvency II capital requirements for UK schemes, making DB provisions so expensive that bulk annuity prices would become cheaper in comparison.”

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