Pension schemes need to act quickly to seize opportunities for annuity buy-ins provided by the eurozone crisis, Towers Watson said today.
The consultancy said bulk annuity and longevity swap providers believed the market turbulence caused by the crisis in the single currency was having a mixed impact on the pension risk transfer market.
While schemes with bigger deficits will usually have to retain some risks for longer, strong demand for liquid assets means trustees holding gilts can sell them and buy annuities at lower cost.
Towers Watson said the volatile market conditions will create windows of opportunity as providers' prices and schemes' asset values move around, but prices could change before a transaction is complete. Providers could also increase prices if they start expecting more defaults on the assets they hold to back annuity commitments, it added.
Ben Stone, a senior consultant at the company, said: 'The latest blow to scheme funding levels has made full buyout a more distant prospect for many schemes. However, this cloud has a silver lining: buying in annuity policies to cover existing pensioners can be more affordable for those who have seen the value of their gilts outpace the rise in annuity prices.
'Market turbulence will open doors then quickly slam them shut, so schemes need to work with providers to accelerate the completion of transactions and lock down the price in the run up to the trading day.'
Publishing its review of the pension risk transfer market, Towers Watson said last year saw bulk annuities and longevity swaps covering £12bn of liabilities being signed, but there had been a relatively slow start to 2012.
Mr Stone said: 'In 2011, there was something of an "end of year sale" as providers cut prices to hit new business targets. Whether it is economic conditions or unfulfilled appetite from providers that makes pricing attractive in future, the schemes that benefit will be those who have cleaned their data and established effective decision-making structures.
'Sometimes, providers with limited capacity may have to choose which schemes to engage with, and it is those who are transaction-ready who will be taken seriously.'
Providers interviewed for the review said schemes looking to enter risk transfer transactions should make sure their trustee and corporate aims are aligned, appoint experienced advisers and establish clear triggers for action.
The next few years are expected to see increased use of solutions involving deferred premiums, partial risk transfers or guaranteed pricing. 'Employers' commitment to tackling their pension legacies often runs deeper than their pockets. Recognising this, providers are developing "buy now, pay later" solutions that require less cash up front in order to bring more schemes to market,' Mr Stone added.
