Pension buyout market fails to hit £10bn mark in 2008

·2008 likely to end £2 billion shy of market forecasts, with total business placed for the year amounting to £8 billion
·Corporate bond uncertainty affects pricing and ability to transact

LONDON. – The insurance buyout market for defined benefit (DB) pension schemes is expected to fail to hit industry forecasts for 2008, falling £2 billion shy of the forecasted year-end £10 billion mark. According to Aon Consulting, a leading pension, benefits and HR consulting firm, the anticipated growth in business did not materialise in the second half of the year due to the global economic crisis sucking liquidity out of the market. Final definitive numbers will be published by Aon Consulting in early 2009.


Aon reports that a major factor for the slowdown relates to corporate bonds, which represent one of the key asset classes that insurers use to back annuities. The lack of liquidity and uncertainty around pricing and increased default risk for corporate bonds had a knock-on effect on bulk annuities from mid-September, with insurers withdrawing guarantees on the assumptions underlying quotations, and being much less prepared to accept any “out of market” risk. Some of the insurers, who had previously been very competitive, increased their pricing significantly, and initially it became difficult to trade.


Aon maintains that the rationale for securing a bulk annuity for pensioner liabilities is still valid for certain schemes, provided the pricing and terms remains attractive. However, where schemes need to realise growth assets (for example equities and property) to pay the premium, they are often reluctant to sell and therefore lock in at current depressed values. In the short term, therefore, transactions are most likely to proceed involving schemes that already hold significant bond assets against the liabilities that are to be secured.

Commenting on the market trends, Paul Belok, principal & actuary at Aon Consulting, said: “The bulk annuity market has inevitably been affected by the financial tsunami hitting financial markets over the last few months. Many pension schemes which were looking at the bulk annuity market earlier in the year are now deferring their review until markets have settled. This has led to total figures for the year falling shy of the much anticipated market growth for 2008.

“More recently, however, we have seen two or three insurers emerge with pricing that continues to offer value, and deals at the smaller and medium end have continued to transact. In the last week we have also seen the announcement of a scheme being bought out for some £1.1 billion – without this deal, however, the fourth quarter numbers would have been very disappointing.

“A number of schemes will perhaps feel that they missed out on a great opportunity to de-risk earlier in the year, which highlights the need for schemes to work with their advisers to define their future road map. In particular, schemes need to identify the triggers that would lead them to transact in the bulk annuity market, and to have prepared the way so that they can react swiftly if and when these circumstances arise in future.”