Your radar for the buyout market

The development of a thriving, competitive pensions buyout market in the UK is a clear success story. Since 2006, when this new phase of the market started up (driven by the new concept of buyout as a de-risking instrument), almost £50bn of pension liabilities have been insured, and 2014 seems set to be the strongest year yet with volumes predicted of £10bn and above.

But is the buyout market delivering enough? Even at a peak ?flow? of c£10bn per annum, this equates to perhaps 0.5% of legacy pension liabilities being insured each year. With most schemes seeing buyout as their ultimate endpoint in the coming decade or two, present volumes are unlikely to satisfy market demand.

So what?s the bottleneck?

Some point to limits in the insurance market?s financial capacity to absorb bulk annuity business. But with Mr Osborne?s overhaul of the retail annuity market releasing new capital for the bulk annuity end of the market and increasing talk of overseas capital and capacity coming to our shores, this is unlikely to be the limiting factor.

The problem lies elsewhere. This is a market blighted by very limited price visibility. And that?s created huge inefficiencies in how we presently ?migrate? pension liabilities away from UK PLC in to the hands of the UK insurance market.

Example. You?re a trustee of a scheme looking at a pensioner buy-in, subject to a corporate budget for de-risking. Your advisers say that their in-house buyout pricing model indicates that a pensioner buy-in may now be within reach. 10 weeks later it is clear from the quotations received that the buyout insurers don?t agree. Outcome? Disappointment for the Trustees, a corporate with less confidence in its advisers and perhaps less sure about the benefits of buyout per se, plus insurer resources churning away on a deal that is not viable at that time.

We?ve spent a lot of time thinking about this challenge. And we think we have the answer, in Skyval.

Skyval was designed and purpose-built to operate as a valuation and analytics platform, operable by multiple advisers, for an array of purposes be that Scheme Funding, financial reporting or asset-liability management. Each adviser gets as much access as they need, but no more, and with the assurance that none of their activity can be accessed or viewed by other parties (?whatever happens in Skyval, stays in Skyval!?). So why not just give insurers access to Skyval, and let them run their pricing calculations on your scheme, using Skyval?s model of your scheme liabilities, to provide an initial price for buyout that reflects insurer appetites and asset books and, most important of all, your scheme profile.

This isn?t a ?watch this space? offering - it?s available now. For schemes already modelled on Skyval, we have negotiated agreements with buyout insurers for them to provide initial prices within days. And this isn?t just for full buyout; using Skyval?s ability to carve out we can easily identify sub-sets of liabilities that we believe to be affordable and take these to market for initial pricing using Skyval.

Think about the implications of new price visibility in the buyout market:

  • Trustees will only need to proceed to later stages of the deal when they are confident it is the cost-effective thing to do, relying on direct insurer pricing information
  • Schemes will only proceed to obtain full quotations when they are confident it is affordable
  • Corporates looking to de-risk will have a reliable indication of what the buyout market can deliver for a given cash injection, and will thus be more willing to commit to financing
  • And insurers will be able to allocate their pricing, sales and operational resources far more efficiently, as non-viable deals are filtered out at an early stage.

And don?t forget, price visibility isn?t just for schemes looking to buy out today. Many schemes have buyout as a long-term objective; others may be looking at a series of buy-ins over many years (look at the rationale behind the recent series of deals by the MNOPF, 4imprint and Western United schemes). Price visibility will mean long-term objectives are set based on fact, not fiction, and ensure that liability tranches are insured at the right time and at the best price.

No need to put up with flying blind. Just use Skyval Insure; your radar in the buyout market.

Like to find out more about Skyval Insure? Click here to book a demo or register for the PwC webcast on 8 December at 3pm.

Jerome Melcer

Jerome Melcer

Jerome is Head of Development for Skyval and a director of PwC. He provides advice to corporates on pension risk, specialising in the area of risk transactions (including buy-ins, buy-outs and longevity hedging).

jerome.s.melcer@uk.pwc.com - 020 7804 2706