Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
    • Moody's - Climate Risk Insurers series
    • Webinars
    • Podcasts
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive
Quick links:
  • Home
  • The Actuary Issues
  • February 2014
02

UK DB schemes paying more for buyouts, says Mercer

Open-access content Tuesday 25th February 2014 — updated 5.13pm, Wednesday 29th April 2020

Defined benefit schemes in the UK pay a lot more to transfer liabilities to a regulated insurer than schemes in other countries, according to Mercer’s Global pension buyout index.

This practice, known as a buyout, is the ultimate de-risking exercise that enables sponsoring employers and trustees to be fully discharged of pension scheme liabilities. After an arrangement has been completed no risk remains.

But Mercer's index revealed that the UK was spending 23% more than the equivalent accounting liabilities to insure them. This compares poorly with the other three countries in the index, as schemes in Ireland spend 17.5%, the US pays 8.5% and in Canada it is just 5%.

Mercer said the main reason why the UK was paying so much more to de-risk was because of the mandatory indexation of pension benefits, which automatically links payment increases to inflation.

David Ellis, Mercer's UK bulk pensions' insurance leader, told The Actuary that mandatory payment increases in retirement were much less common in the US, for example.

Ellis explained that the mandatory indexation in the UK had two major impacts. 'Technically speaking it makes the average length that a pension needs to be paid for longer [which increases the length of the liability]. Additionally, there's a risk premium attached [to the cost of] taking on inflation risk in the UK.'

Despite this, UK bulk annuities had a strong 2013 with an estimated 200 transactions.

He added that schemes needed to take into consideration local differences specific to each country 'such as the spread of corporate bonds over and above gilts yields' which would represent some differences between the US and UK at any one point in time and indeed in any other country involved.

Mercer also noted that multinationals considering a buyout need to balance the risks and costs associated with de-risking in one country against other factors and determine if de-risking in another country would be more cost-effective.

A buyout represents only one range of strategies for managing pension risk 'but remains appealing for some,' Mercer stated.

'Timing, preparation and regular monitoring is the real key to mitigating the cost - in current volatile market conditions it is all too easy for a real opportunity to pass by,' the consultants advised.

Mercer's DB risk leader Frank Oldham added: 'As economic conditions and company finances improve, we are seeing interest in buyouts grow across the US, UK, Canada and Ireland.'

 

This article appeared in our February 2014 issue of The Actuary.
Click here to view this issue
Filed in
02
Topics
Pensions

You might also like...

Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Pensions Actuarial Analyst

London, Midlands, Scotland
£Market Competitive
Reference
143788

Senior Manager/Director level roles - Life insurance

Stirling
Generous salary with excellent bonus and benefits
Reference
143787

Reinsurance Pricing Actuary

London (Central)
£60-90K depending on experience
Reference
143786
See all jobs »
 
 

Today's top reads

 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2023 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited. All rights reserved. Reproduction of any part is not allowed without written permission.

Redactive Media Group Ltd, 71-75 Shelton Street, London WC2H 9JQ