At £35bn, 2014's record derisking activity has exceeded initial estimates, a report has found, with experts also predicting a changing view of longevity will bring sustained market growth.
Several large transactions last year boosted the size of the market, most notably ICI Pension Scheme's £3bn buy-in and the TRW Pension Scheme's partial buyout of £2.5bn (see box).
Bumper deals in 2014
The two largest buy-in/buyout transactions of all time took place during 2014: ICI Pension Scheme completed a £3bn buy-in and the TRW Pension Scheme completed a partial buyout of £2.5bn. Both deals were made through insurer Legal & General.
Total Pension Scheme completed a buy-in worth £1.6bn with Pension Insurance Corporation.
The BT Pension Scheme used insurer Prudential to hedge 25 per cent of its longevity risk through a £16bn longevity swap.
Consultancy LCP last week reported the size of the buy-in and buyout market in 2014 at more than £13bn and the longevity swap market at £22bn - beating its estimates late last year of £10bn and £20bn, respectively.
“This confirms what the final size of the market was,” said Emma Watkins, partner at LCP. “It’s a confirmation of an incredible year, because the insurers have only just announced [their full-year results].”
Watkins said while both markets had been buoyed by high-profile transactions, indications are that trustees are becoming more comfortable with different derisking transactions and incorporating longevity risk into how they run their schemes.
“I expect this to continue,” Watkins said. “A few transactions happened for corporate reasons, but a lot happened for derisking… People are taking longevity risk alongside the market risk.”
The UK’s equity market returns may also have pushed schemes ahead of their recovery plans, giving them the “budget” to derisk, Watkins said.
It’s a confirmation of an incredible year, because the insurers have only just announced their full-year results
Emma Watkins, LCP
LCP noted the increased popularity of new forms of security structures as a contributing factor in large transactions taking place.
Mark Paxton, senior bulk annuity consultant at consultancy Barnett Waddingham, said: “I suspect what has happened is insurers, consultants, lawyers and trustees have got more used to what the issues with these transactions are. They’re more used to what they need to do to get them over the line.”
Paxton added schemes looking to complete buy-ins and buyouts may have looked to match insurer pricing. This can reduce their vulnerability to the low gilt yields that have affected many schemes.
“Trying to do a full buyout for deferreds and pensioners can be a little difficult unless you’ve matched your entire asset strategy,” he said.
“Some of these schemes will have been working towards this for some time and therefore even if gilt yields are low it means their asset returns will have increased as well.”
Stuart O’Brien, partner at law firm Sackers, said trustees considering derisking transactions should ensure their scheme is in order before going ahead.
“The more work you can do upfront on benefits and data, the easier it will be,” he said.
