Buy-out market blues

Specialist pension buy-out companies will not be cheered by the latest analysis of their faltering sector.

Buy-out specialists that sprang up a few years ago to take over liabilities of defined benefit schemes got off to a strong start but the market has fallen flat in the financial crisis.

According to a report by pension consultants Hymans Robertson, the buy-out and buy-in deals struck in the first half of the year amounted to just £1.5bn, less than 40 per cent of deals done this time last year. The average size of deals has also fallen to less than £20m this year.

Pension schemes that are likely to take the step to a buy-out this year are those that have already gone some way to reducing risk and were not hit too badly by the equity market crash last year, or schemes where the sponsoring employer has become insolvent, says Richard Shackleton at Hymans Roberston.

But what about the pension plans of companies where profits are coming under pressure and the gap between assets and liabilities is adding to an increasing burden? It is just those schemes that need to go along the buy-out route but simply can’t afford to top up deficits or pay the premiums necessary for a deal.

Traditional buy-outs may be faltering but pension schemes, especially the larger ones, are looking at another way to help reduce their risk that does not involve tackling deficits or paying premiums -longevity hedging.

Babcock International and RSA’s recent longevity swaps have led the way on this and similar deals will provide a further challenge to the traditional buy-out market as an alternative way of managing retirement liabilities.

They might even help to bring the costs of a buy-out down.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.