RPI-CPI uncertainty hits buyout market

Only £600m of buyout deals were completed by September 30, 2010, compared to £2.2bn in the second quarter, says research carried out by Pension Capital Strategies (PCS) and shown toschemeXpert.com .

Insurers were being forced to reconsider the terms of their bulk annuity contracts owing to uncertainty over the government’s plans concerning a shift from the retail prices index (RPI) to the consumer prices index (CPI) in calculating pension increases.

Continuing a historical decline in buyout quotations since a peak at £21bn in the final quarter of 2009, Q3 2010 saw only £10.5bn of new quotations. Not a single longevity swap was agreed over the same period.

However, PCS reported insurers are confident of a “healthy pipeline” leading to a strong final quarter, and buyout business for the year has already surpassed its 2009 level, with £3.5bn transacted.

The report speculates a number of deals were currently in negotiation to be completed in the final quarter.

“We expect a number of transactions to take place during the final quarter of 2010, so that the level of activity in Q4 is closer to that seen in the early part of the year,” said the PCS report.

“Where the opportunity exists it may be prudent for schemes to transact prior to the year end as some insurers will offer attractive prices to complete deals in 2010.”

Jay Shah (pictured), co-head of Business Origination at Pension Corporation, said the market is “maturing rapidly”.

“There was a slow down in Q3 2010 reflecting uncertainty over the conversion from RPI to CPI but has picked up since then with a strong 2011 pipeline,” he said.

The conversion rate from a pension scheme’s initial enquiry to a bulk annuity purchase is now up to around 30%, he said, up from 5% in 2008.

He added: “Scheme trustees and finance directors are keener to de-risk and have a better understanding of what the insurance market has to offer.”

News of a weak third quarter comes a week after Goldman Sachs subsidiary Rothesay Life announced its purchase of Paternoster, which was put up for sale after being forced to close to new buyout business during the financial crisis.