22 February 2010
Published in: Longevity - mortality
Mercer launches pension buy-out index
A company with a mature pension plan with accounting liabilities and assets of £100m could obtain a bulk annuity deal with an insurer with additional costs of around £44m, according to data analyzed in Mercer's new pension buy-out index. The cost reflects the difference in valuation methodologies between corporate accounting standards and insurance company requirements.
The index is based primarily on pricing data from three of the leading UK life insurers active in pensions de-risking, Aviva, Legal & General and Pensions Insurance Corporation. The index provides plan sponsors with a monthly snapshot of the affordability of purchasing a bulk annuity - more commonly known as a buyout or buy-in.
"Purchasing a bulk annuity from a life insurer is a key way to manage or remove a pension plan's obligations and the associated risks," commented David Ellis, head of longevity risk management at Mercer. "It is a significant transaction however, and knowing when to trade can be difficult as most existing reviews of the UK bulk annuity market are either not available frequently enough or are based on the bulk annuity prices offered by only one insurer. Mercer's index gives sponsors much more clarity when considering this tactic."
Around 125 buyout/buy-in transactions were completed in 2009, ranging from the largest, at £1.9bn, between RSA Insurance and Rothesay Life - owned by Goldman Sachs - to the smallest involving a premium of less than £100,000. In addition to the RSA deal, around a further £4bn of pension assets transferred to the insurance sector in 2009.
Mercer believes that interest in insurance-based products for managing pensions risk is likely to increase in 2010, fuelled by significant interest from many companies in seeking to divest themselves of their legacy pension obligations.
According to Ellis, "The relative pricing between buyout and accounting costs may seem high but this is the price of the 'trade off' to remove the pension risks and is increasingly seen as an acceptable cost to eliminate pensions risks."
The Mercer index allows companies to track a representative buy-out/buy-in cost for removing or managing defined benefit pension obligations. Published monthly, it tracks the development over time of the gap between the gross liability, before allowing for plan assets, in a company's accounts (assessed under common accounting standards) and the total price of a buy-out or buy-in. The value of existing plan assets will affect the level of additional cash needed to meet the overall cost of a buyout or buy-in. The index is based on a representative pension plan with pensioner and non-pensioner members.