Around two-thirds of defined benefit schemes worth more than £1bn are exploring derisking strategies, according to research, with climbing deficits and product innovation seen as key drivers.
Industry commentators have signalled 2015 could be a bumper year for the derisking market as pension funds tackle growing liabilities.
Research released last week by Legal & General found nearly two-thirds (64 per cent) of 40 pension schemes with assets of more than £1bn were planning to manage liabilities through an insurance or derisking product rather than retain and manage the risk on an ongoing basis.
The report stated nearly half (47 per cent) of schemes intending to derisk said they were looking to arrange a buy-in or buyout over the next five years.
Michael Edwards, head of solutions in L&G’s bulk annuity and longevity division, said the research findings reflected a widespread shift in the derisking market over the past couple of years.
“From 2007 or 2008 we have seen proactive derisking from scheme sponsors,” he said. “Large schemes tend to set the trend, drive innovation and product ideas… When trustees and companies work together it typically leads to more successful outcomes.”
Aon Hewitt also last week forecast a busy year for the longevity swap market, predicting inflows of £20bn during 2015, with deals as low as £50m currently being priced.
Last year witnessed a handful of notable derisking deals by some larger pension funds. ICI Pension Fund agreed a £3.6bn buy-in with L&G, while BT entered into a £16bn swap to hedge more than a quarter of its exposure to longevity risk.
Corporate pension schemes are running a record aggregate deficit of £367.5bn, according to the Pension Protection Fund – up £101.2bn from levels recorded at the end of December 2014.
James Mullins, head of the buyout solutions team at consultancy Hymans Robertson, said: “With very large deficits a full scheme buyout is not affordable for many schemes right now, but most schemes could afford and would be able to do a buy-in or longevity swap.”
He added: “It’s bad news out there, but rather than sit and wait for the cards to get better… schemes are grabbing this and starting to chip away at the problem.”
Longevity swaps on the rise
New deal structures are providing smaller schemes with a route into the longevity swap market. The £2.5bn Merchant Navy Officers Pension Fund directly accessed the reinsurance market at the end of 2014 through an offshore captive arrangement.
By cutting out an intermediary bank or insurer, the fund was able to make a significant cost-saving of an estimated £10m.
Consultancy PwC last week announced the development of a platform to lower the cost of longevity swaps.
The structure aims to provide pension funds with direct access to reinsurers and will open up the longevity market to pensions schemes with liabilities as low as £250m.
Pension schemes will also have a choice over who operates the contract, potentially leading to lower costs overall.
LDI branches out
Many schemes have already implemented liability-driven investment strategies to control rising deficits. More than two-thirds (67 per cent) of schemes surveyed by L&G had already taken a liability management path, while the rest had planned to do so.
Shajahan Alam, head of solutions research for UK LDI at Axa Investment Managers, said he thought pension schemes were pursuing new types of strategies in their LDI portfolios.
“Pension schemes are looking to annuity-type asset strategies where they invest in credit and hedge away their rate and inflation risk. The long-term path for pension funds is to move towards that kind of strategy,” said Alam.
“There is a lot of demand from schemes for LDI, but there is £1.7tn of liabilities out there looking to be hedged.”
