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The Actuary The magazine of the Institute & Faculty of Actuaries

Q3 pension risk transfers hit by falling gilts and equities

The firm said that the potential double-whammy effect, highlighted as a risk in the previous quarter analysis, was borne out as gilt yields fell 30bps and equity markets plunged 20%.

PIC also noted that pension insurance buyouts and buy-ins, which in July had reached their most affordable level since the summer of 2008, before the Lehman bankruptcy, had seen a reversal of fortune.

Bulk annuity affordability for pension funds had plunged by 14% to the end of September, and insurance affordability for deferred members of pension schemes had also dropped to within touching distance of the lows seen in March 2009.

While affordability for pensioner solutions, typically buy-ins, had dropped from recent highs, PIC said that they remained a relatively attractive proposition for schemes holding gilts, and that currently insurance may be cheaper for pensioners than holding gilts.

The firm said that trustees would be tempted to increase their allocation to equities as a means of making good their deficits, reversing the existing de-risking trend, but that this may not a reasonable action for many pension funds.

In the short term, if there is a sovereign default, PIC says this may impact the equity markets and gilt yields even further. In the longer term, pension funds risk a liquidity crunch, where they might be unable to meet liabilities as they fall due out of income, and therefore become forced sellers of assets (equities) potentially at a low point in the market.

Jay Shah, co-head of business origination (pictured), said: "There is no doubt that pension funds and their sponsors are in a difficult position. Many failed to de-risk over the past couple of years, hoping for an equity fillip, but a second leg of the on-going crisis illustrates that pension schemes should be looking to take risk off the table wherever they can, not adding to it.

"Around 40% of pension schemes had their last triennial valuation in March 2009 - the worst possible time for them and their sponsors in recent memory. Their next valuation will be in March 2012 and this may not be any better. Deficits have risen further, forcing many schemes to demand ever higher contributions from their sponsor, further weakening the covenant at a time of real economic danger."