Pension buy-out bonanza cancelled

Pensions bonanza cancelled

Pensions bonanza cancelled

Now it’s official – the much trumpeted pension buy-out market has fallen flat. And just to spell it out, a report by Punter Southall called the False Dawn reveals that most (about 84 per cent) pension schemes trying to transfer liabilities to an insurer through a buy-out would find it cheaper to just adopt the same low-risk investment strategy an insurer would use.

After doing £8bn of business last year, some insurers and  consultants said the market would grow like Topsy but instead it has notched up less than a quarter of that in the first half of this year. Punter Southall expects it to tail off to around £3bn at year end.

The recession, and the specialist buy-out insurers’ lack of capital to pursue deals, has been blamed for the fall off but Punter Southall says it is the removal of price discounts that has killed demand.

Buy-out specialists were offering as much as 10 per cent discount in 2007 to whet appetites but soon found that cutting so deeply into their profit margins just didn’t work.

Without discounting, the buy-out route is unaffordable for most pension funds, which have seen funding levels fall due to investment losses. This has hit the specialists in particular. Paternoster has stopped writing new business due to a lack of capital. Punter Southall suggests the insurer will not be an active player in the market for the forseeable future.

Attention has turned from buy-outs to longevity swaps this year. Punter Southall expects this market to grow, but warns there are still obstacles to overcome if this market is to avoid going the same way as buy-outs.

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FTfm is no longer updated but it remains open as an archive.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