Credit crisis sparks pension buyout slump
Turmoil in global financial markets is forcing pension fund trustees to put off pursuing a buyout for their schemes, leaving volatile pension risks on company balance sheets, industry executives say.
HSBC bad debts hit 8.7 billion poundsSoaring yields on corporate bonds are also forcing insurers taking on the schemes to reassess their risk, resulting in rising costs for buyouts, which are effectively the buying of a bulk annuity contract.
"Given the conditions in the credit markets over the past few weeks, insurers are taking a cautious view of credit risk going forward and that has led to prices nudging higher," said Clive Wellsteed, a partner at consultant actuary firm Lane, Clark & Peacock.
"Trustees will probably wait for the dust to settle to get a more orderly transaction from the scheme to the insurer."
The drying up of the buyout market compares starkly with early September, which saw the biggest bulk annuity transaction with telecoms group Cable & Wireless entering a 1 billion pound deal with Prudential.
Until recently companies had increasingly sought to remove the risk associated with their pension schemes by transferring assets and liabilities to an insurer. In a full buyout, companies get a "clean break" from their liabilities, with insurers taking on all pension payments.
Typically the cost of a full buyout is estimated at around 130 percent of the value of liabilities measured on the basis of the IAS 19 accounting standard. But over the past month, this cost has risen to up to 140 percent of liabilities.
Wellsteed said: "Buyouts are no longer the no-brainer they were six months ago. On the other hand, the last six months have highlighted to trustees and companies how much risk there is in company pension schemes and as a result of that they might be willing to pay more money to take that risk off the table."
Pension buyout company Paternoster's chief executive, Mark Wood, told Reuters the slowing down of the market was due to insurers' reluctance to price deals.
That reluctance has emerged because the credit crisis has caused a sharp widening of spreads between investment grade corporate bonds and government bonds, making insurers more cautious of pricing the corporate bonds that often constitute a large part of a pension fund's assets.
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