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The Actuary The magazine of the Institute & Faculty of Actuaries

CPI uncertainty hits Q4 buyout activity

A continued lack of activity in the pensions buyout market in the last quarter of 2010 was due to uncertainty over CPI-linked instruments, says Punter Southall in its latest De-risking Solutions Update.

The consultant noted that, apart from one large deal completed by Prudential, Q4 2010 was another quiet quarter in the bulk annuities market despite an improvement in pricing, and there were no longevity swaps for the third consecutive quarter.

It says that the European Court of Justice’s judgment banning the use of sex as a risk factor for individual insurance products is unlikely to have a direct impact on the bulk annuities market, but the full implications are as yet unknown.

Total bulk annuity business written last year was £5.1bn, £1.4bn higher than 2009. This compares with the total buy-out liability of defined benefits schemes of approximately £1,400bn.

The firm goes on to say that the January 2011 Pall Pension Scheme deal with J.P. Morgan - the first scheme to enter into an index-based longevity swap and the first to enter a deal aimed at hedging longevity risk for non-pensioners - shows that the market for longevity hedging continues to develop as risk management techniques become available to a wider number of schemes.

The deal covered £70m of liabilities and protects against rises in life expectancy predicted for its non-pensioner members over the next 10 years. During the 10-year duration, the scheme will receive a payout if life expectancy increases faster than pre-determined rates.

Punter Southall says that, although there is some question of exactly how much risk such index-based hedges remove, it expects these policies to be of interest to the smaller to medium-size schemes that are typically unable to enter the bespoke longevity swap market.

Bulk annuity business 2010: current active market players

Q1 2010 Q2 2010 Q3 2010 Q4 2010

Aviva £345m £65m £135m £325m

Legal & General £140m £300m £90m £360m

Lucida - £100m - -

MetLife £235m £65m - £35m

Pension Ins Corp £305m £375m £45m -

Prudential - - - £900m

Rothesay Life - £1,300m - -

Total £1,025m £2,205m £270m £1,620m