Uncertainty around inflation rates and concerns about market volatility have fuelled a steady increase over the past 12 months in the number of pension schemes looking to de-risk their strategies, according to research published by Clear Path Analysis.
But, in a report issued yesterday, the analysts said that while the amount of longevity hedges and pensions buyouts was on the rise, the numbers of longevity swaps had only just reached above double figures.
Its research found that 60% of industry respondents were surprised at the slow pace of development, with 80% suggesting this was due to costs and complexities involved in transactions.
At the same time, 60% of pension schemes said that counterparty risk was slowly becoming the most critical issue to address when considering a buy-out transaction or longevity hedge.
Kelvin Wilson, head of pension risk solutions at Grant Thornton UK said the de-risking market was responding to trustee and employers concerns over the cost and financing of de-risking solutions.
'Solutions are now being offered that are bespoke to the profile of pension scheme liabilities, level of funding and the strength of the employer's covenant. Schemes holding gilt investments may find that the cost of de-risking their pensioners, using a buy-in solution, might have come down relative to the cost of funding.'
Scheme trustees and sponsors want to manage their pension risks better, he added, and were taking advantage of the rising value of their gilt portfolios to de-risk schemes - despite deteriorating funding levels.
In the report, Tiziana Perrella, principal at JLT Pension Capital Strategies, highlighted a 'phenomenal growth' in de-risking activity over the past few years. Competition created by new entrants has pushed prices down, she said, so they represent 'very good value' in terms of the risk passed across.
'Insurers are able to invest in a larger and more sophisticated asset mix than even the largest of pension schemes; they can better assess the longevity risk and manage it, through reinsurance or as a result of the mix of business on their books; they can administer schemes efficiently through economies of scale,' she added.
Isobel France, a partner at Linklaters, said counterparty risk was a major issue to be considered and specialist advice was essential.
'Very often, the circumstances which make such a transaction appropriate come together at the last minute - and the parties then need to move quickly and prior preparation will help smooth any transaction.
'The trustees will be taking on counterparty risk in any transaction. They will want to understand what kind of entity is the counterparty, what safeguards exist if that counterparty becomes insolvent and are there options which can improve that position,' she added.
