The bulk buyout market is set to grow exponentially this year, creating massive opportunities for corporate advisers.
The sector, which has typically been valued at between £1bn and £2bn a year, could top £12bn in 2008, according to Paternoster, and many corporate advisers and employee benefits consultants have been quick to grasp the nettle.
The majority of the largest EBCs, such as Hewitt and Mercer, have operated specialist buyout teams for several years, while many corporate advisers have also successfully moved into this space.
But with the market set for such explosive growth, there is a real danger that some corporate advisers, who either lack the knowledge or confidence to advise on bulk buyouts, could lose clients as their corporate customers are forced to look elsewhere for this specialist advice.
Much of the growth in the buyout market is being driven by the explosion of new entrants, ranging from recently-launched insurers, including Paternoster and Synesis Life, to overseas players like MetLife and more established players, such as Aegon, Legal & General and Prudential.
The newer players have been a key driver behind much of the innovation seen in the sector over the past two years, bringing increasingly sophisticated risk management solutions, such as partial buyouts, to market. The increased competition has also driven down prices and increased capacity, opening up the world of bulk buyouts to a much wider range of companies than ever before.
“The buyout market has changed dramatically in the past 12-18 months,” says Ian Aley, business development director at Paternoster. “A couple of years ago there were only a small number of insurance companies and a one-size-fits-all approach. Now, there are a lot more insurers and a lot more offerings available.”
The growth of the market has also created a domino effect, says Steven Haasz, managing director of corporate solutions at Prudential. He says more and more companies are now willing to consider buyouts as an effective means of risk management after seeing respected peers complete deals.
“At the start, companies looking at buyouts tended to have little choice as their covenants were in danger or they were insolvent. Now we are seeing solvent, well-run businesses actively choosing to remove this volatility from their balance sheets,” Haasz says.
But rather than viewing this as a threat, advisers should seize it as an opportunity, because as more companies consider buyouts and the complexity of the offerings grows, so does trustees’ need for advice.
Furthermore, when defined contribution solutions are put in as replacements, advisers’ expertise will again be necessary. So what does the adviser need to consider?
Nick Johnson, head of defined benefit risk management at Norwich Union says: “The corporate adviser needs to carry out the cost benefit analysis of a buyout, and, depending on their relationship with the trustee, tell them ‘this is the cost, this the deficit and this is how you can fund it.'”
With many companies unable to afford a full buyout, partial or phased buyouts may be more suitable.
These can be managed in several ways, with an increasingly popular approach being to just buyout the pensioners and leave deferred and active members with the scheme.
P&O bought out its pensioners in an £800m deal last year, the largest ever partial buyout.
Charlie Finch, a partner at Lane, Clark & Peacock, says: “Partial buyouts can be used to remove the risk but it does not close the scheme and set the members adrift. Many employers want to downsize a scheme but retain it for existing employees.”
A partial buyout could well be sufficient for many companies, Haasz says, if, for example, they find 80 per cent of the volatility is caused by 20 per cent of the members.
The tranches can now be spliced and diced in pretty much any way imaginable with insurers particularly willing to create bespoke arrangements for larger schemes.
The preparation before obtaining quotes from insurers is a rigourous process, Finch says. All of the scheme members’ data, including descriptions of benefits and increases, needs to be verified and then presented to the insurers in a suitable format.
The accuracy and quality of this data is of paramount importance, says Johnson, and bigger schemes can typically benefit from their broader mortality history.
“Bigger schemes have a lot more history and we can take account of that in the price,” he says. “With smaller schemes it is much more difficult to assess mortality risk if there are only one or two deaths a year.”
Price is of course the driver in many of these deals, particularly with small schemes. Finch says a “reasonable-sized” scheme of £100m will typically attract 10 quotes while even a £5m scheme will still attract four or five insurers. Specialist advisers are taking advantage of this and developing increasingly sophisticated means to take advantage of the fierce competition in the market to obtain the best price for their clients.
Generalising can be tricky, but Haasz says deals normally take 2-3 months at best to complete, but more complicated arrangements can take years to put in place.
The completion of the deal by no means has to equal the loss of a client. Although some larger firms prefer to employ specialist independent teams to remove any conflicts of interest their existing corporate adviser or scheme actuary may have, many companies are now offering bundled solutions.
Tony Read, marketing manager at Aegon Trustee Solutions, says companies offloading DB schemes will still need advice whether it be around a replacement or parallel defined contribution scheme or flexible benefits, for example.
“We are increasingly looking at corporate clients as a whole and pulling together the different parts of the company to provide a joined up solution,” he says.
NU also provides a bundled package and as Johnson warns: “If you don’t get paid for winding your client’s scheme up someone else will and you may end up losing the client altogether.”n
Focus: Tony Read, marketing manager, Aegon Trustee Solutions
Dealing in bulk
There has been much talk about the growth potential of the pensions buyout market following the glut of new entrants over the past two years and that is being supported by major deal flows.
The last five months have seen both the UK’s largest ever pension scheme transfer and the biggest ever partial transfer.
In February, Rothesay Life, a subsidiary of Goldman Sachs, bought out the £700m Rank Group final salary pension scheme.
Mercer was lead consultant on the deal and David Ellis, principal at the firm, says the transfer secures in full the accrued benefits of the 19,000 members, including mortality risk.
Last December, Paternoster took on shipping group P&O’s 11,000 pensioners in an £800m partial buyout.
Tony Read, marketing manager at Aegon Trustee Solutions, says: “The market has changed dramatically in a short space of time and if 2007 was the year of innovation, 2008 looks set to be the year when a lot of the bigger deals start coming through.”
There are indications that suggest a number of record-breaking deals are in the pipeline.
Prudential has been asked to quote on potential £1bn-£2bn transfer deals in the last month. Norwich Union has even been asked to provide a quote on a £4bn buyout.
Nick Johnson, head of defined benefit risk management at Norwich Union, says: “We started in 2006 and probably saw one or two deals over £100m. Now we have 10 and have just got a request from a £4bn scheme.”
With greater capacity and increasingly sophisticated buyout arrangements constantly being developed, expect a lot of newsflow from the sector this year.
Case study: Charlie Finch, partner, Lane, Clark & Peacock
The price of increasing competition
Corporate advisers are looking to take advantage of the increasingly fierce competition in the buyout market to drive down costs for their clients.
Internet auctions are becoming more commonly used with a range of strategies adopted to get the lowest price.
In March, Lane, Clark & Peacock held an internet auction for client Blue Prince Mushrooms’ £6.5m pension scheme.
Partner Charlie Finch says the pension scheme was split into three, between pensioners, young deferred and older deferred members. Four insurers quoted for the business and could see whether they were ranked first, second, third or fourth for each category. The deal on offer was a total buyout, so the insurer with the best overall offer was chosen.
There was a 30 minute auction with most of the bid action coming in the last five minutes.
Finch says: “Internet auctions work very well for small schemes where you need to demonstrate you got the best price. The process is transparent and provides an audit trail.”
LCP also held an online auction for Morgan Crucible’s pensioners in a £160m partial buyout last month.
The bid process had three rounds with each insurer knowing their own price but also how far they were from the best price.
“If the lead insurer does not know how far ahead they are, they are not under any pressure to cut their price to maintain their lead,” he says.
In this case, the lead insurer cut their price by 9 per cent in the first round and a couple of per cent in the following two rounds.
“Whereas a company typically paid a 30 per cent premium for a buyout a few years ago, Morgan Crucible made a 3 per cent profit on its buyout, compared to the scheme’s accounting position,” Finch adds.
The bulk buyout market is set to grow exponentially this year, creating massive opportunities for corporate advisers.
The sector, which has typically been valued at between £1bn and £2bn a year, could top £12bn in 2008, according to Paternoster, and many corporate advisers and employee benefits consultants have been quick to grasp the nettle.
The majority of the largest EBCs, such as Hewitt and Mercer, have operated specialist buyout teams for several years, while many corporate advisers have also successfully moved into this space.
But with the market set for such explosive growth, there is a real danger that some corporate advisers, who either lack the knowledge or confidence to advise on bulk buyouts, could lose clients as their corporate customers are forced to look elsewhere for this specialist advice.
Much of the growth in the buyout market is being driven by the explosion of new entrants, ranging from recently-launched insurers, including Paternoster and Synesis Life, to overseas players like MetLife and more established players, such as Aegon, Legal & General and Prudential.
The newer players have been a key driver behind much of the innovation seen in the sector over the past two years, bringing increasingly sophisticated risk management solutions, such as partial buyouts, to market. The increased competition has also driven down prices and increased capacity, opening up the world of bulk buyouts to a much wider range of companies than ever before.
“The buyout market has changed dramatically in the past 12-18 months,” says Ian Aley, business development director at Paternoster. “A couple of years ago there were only a small number of insurance companies and a one-size-fits-all approach. Now, there are a lot more insurers and a lot more offerings available.”
The growth of the market has also created a domino effect, says Steven Haasz, managing director of corporate solutions at Prudential. He says more and more companies are now willing to consider buyouts as an effective means of risk management after seeing respected peers complete deals.
“At the start, companies looking at buyouts tended to have little choice as their covenants were in danger or they were insolvent. Now we are seeing solvent, well-run businesses actively choosing to remove this volatility from their balance sheets,” Haasz says.
But rather than viewing this as a threat, advisers should seize it as an opportunity, because as more companies consider buyouts and the complexity of the offerings grows, so does trustees’ need for advice.
Furthermore, when defined contribution solutions are put in as replacements, advisers’ expertise will again be necessary. So what does the adviser need to consider?
Nick Johnson, head of defined benefit risk management at Norwich Union says: “The corporate adviser needs to carry out the cost benefit analysis of a buyout, and, depending on their relationship with the trustee, tell them ‘this is the cost, this the deficit and this is how you can fund it.'”
With many companies unable to afford a full buyout, partial or phased buyouts may be more suitable.
These can be managed in several ways, with an increasingly popular approach being to just buyout the pensioners and leave deferred and active members with the scheme.
P&O bought out its pensioners in an £800m deal last year, the largest ever partial buyout.
Charlie Finch, a partner at Lane, Clark & Peacock, says: “Partial buyouts can be used to remove the risk but it does not close the scheme and set the members adrift. Many employers want to downsize a scheme but retain it for existing employees.”
A partial buyout could well be sufficient for many companies, Haasz says, if, for example, they find 80 per cent of the volatility is caused by 20 per cent of the members.
The tranches can now be spliced and diced in pretty much any way imaginable with insurers particularly willing to create bespoke arrangements for larger schemes.
The preparation before obtaining quotes from insurers is a rigourous process, Finch says. All of the scheme members’ data, including descriptions of benefits and increases, needs to be verified and then presented to the insurers in a suitable format.
The accuracy and quality of this data is of paramount importance, says Johnson, and bigger schemes can typically benefit from their broader mortality history.
“Bigger schemes have a lot more history and we can take account of that in the price,” he says. “With smaller schemes it is much more difficult to assess mortality risk if there are only one or two deaths a year.”
Price is of course the driver in many of these deals, particularly with small schemes. Finch says a “reasonable-sized” scheme of £100m will typically attract 10 quotes while even a £5m scheme will still attract four or five insurers. Specialist advisers are taking advantage of this and developing increasingly sophisticated means to take advantage of the fierce competition in the market to obtain the best price for their clients.
Generalising can be tricky, but Haasz says deals normally take 2-3 months at best to complete, but more complicated arrangements can take years to put in place.
The completion of the deal by no means has to equal the loss of a client. Although some larger firms prefer to employ specialist independent teams to remove any conflicts of interest their existing corporate adviser or scheme actuary may have, many companies are now offering bundled solutions.
Tony Read, marketing manager at Aegon Trustee Solutions, says companies offloading DB schemes will still need advice whether it be around a replacement or parallel defined contribution scheme or flexible benefits, for example.
“We are increasingly looking at corporate clients as a whole and pulling together the different parts of the company to provide a joined up solution,” he says.
NU also provides a bundled package and as Johnson warns: “If you don’t get paid for winding your client’s scheme up someone else will and you may end up losing the client altogether.”n
Focus: Tony Read, marketing manager, Aegon Trustee Solutions
Dealing in bulk
There has been much talk about the growth potential of the pensions buyout market following the glut of new entrants over the past two years and that is being supported by major deal flows.
The last five months have seen both the UK’s largest ever pension scheme transfer and the biggest ever partial transfer.
In February, Rothesay Life, a subsidiary of Goldman Sachs, bought out the £700m Rank Group final salary pension scheme.
Mercer was lead consultant on the deal and David Ellis, principal at the firm, says the transfer secures in full the accrued benefits of the 19,000 members, including mortality risk.
Last December, Paternoster took on shipping group P&O’s 11,000 pensioners in an £800m partial buyout.
Tony Read, marketing manager at Aegon Trustee Solutions, says: “The market has changed dramatically in a short space of time and if 2007 was the year of innovation, 2008 looks set to be the year when a lot of the bigger deals start coming through.”
There are indications that suggest a number of record-breaking deals are in the pipeline.
Prudential has been asked to quote on potential £1bn-£2bn transfer deals in the last month. Norwich Union has even been asked to provide a quote on a £4bn buyout.
Nick Johnson, head of defined benefit risk management at Norwich Union, says: “We started in 2006 and probably saw one or two deals over £100m. Now we have 10 and have just got a request from a £4bn scheme.”
With greater capacity and increasingly sophisticated buyout arrangements constantly being developed, expect a lot of newsflow from the sector this year.
Case study: Charlie Finch, partner, Lane, Clark & Peacock
The price of increasing competition
Corporate advisers are looking to take advantage of the increasingly fierce competition in the buyout market to drive down costs for their clients.
Internet auctions are becoming more commonly used with a range of strategies adopted to get the lowest price.
In March, Lane, Clark & Peacock held an internet auction for client Blue Prince Mushrooms’ £6.5m pension scheme.
Partner Charlie Finch says the pension scheme was split into three, between pensioners, young deferred and older deferred members. Four insurers quoted for the business and could see whether they were ranked first, second, third or fourth for each category. The deal on offer was a total buyout, so the insurer with the best overall offer was chosen.
There was a 30 minute auction with most of the bid action coming in the last five minutes.
Finch says: “Internet auctions work very well for small schemes where you need to demonstrate you got the best price. The process is transparent and provides an audit trail.”
LCP also held an online auction for Morgan Crucible’s pensioners in a £160m partial buyout last month.
The bid process had three rounds with each insurer knowing their own price but also how far they were from the best price.
“If the lead insurer does not know how far ahead they are, they are not under any pressure to cut their price to maintain their lead,” he says.
In this case, the lead insurer cut their price by 9 per cent in the first round and a couple of per cent in the following two rounds.
“Whereas a company typically paid a 30 per cent premium for a buyout a few years ago, Morgan Crucible made a 3 per cent profit on its buyout, compared to the scheme’s accounting position,” Finch adds.
The bulk buyout market is set to grow exponentially this year, creating massive opportunities for corporate advisers.
The sector, which has typically been valued at between £1bn and £2bn a year, could top £12bn in 2008, according to Paternoster, and many corporate advisers and employee benefits consultants have been quick to grasp the nettle.
The majority of the largest EBCs, such as Hewitt and Mercer, have operated specialist buyout teams for several years, while many corporate advisers have also successfully moved into this space.
But with the market set for such explosive growth, there is a real danger that some corporate advisers, who either lack the knowledge or confidence to advise on bulk buyouts, could lose clients as their corporate customers are forced to look elsewhere for this specialist advice.
Much of the growth in the buyout market is being driven by the explosion of new entrants, ranging from recently-launched insurers, including Paternoster and Synesis Life, to overseas players like MetLife and more established players, such as Aegon, Legal & General and Prudential.
The newer players have been a key driver behind much of the innovation seen in the sector over the past two years, bringing increasingly sophisticated risk management solutions, such as partial buyouts, to market. The increased competition has also driven down prices and increased capacity, opening up the world of bulk buyouts to a much wider range of companies than ever before.
“The buyout market has changed dramatically in the past 12-18 months,” says Ian Aley, business development director at Paternoster. “A couple of years ago there were only a small number of insurance companies and a one-size-fits-all approach. Now, there are a lot more insurers and a lot more offerings available.”
The growth of the market has also created a domino effect, says Steven Haasz, managing director of corporate solutions at Prudential. He says more and more companies are now willing to consider buyouts as an effective means of risk management after seeing respected peers complete deals.
“At the start, companies looking at buyouts tended to have little choice as their covenants were in danger or they were insolvent. Now we are seeing solvent, well-run businesses actively choosing to remove this volatility from their balance sheets,” Haasz says.
But rather than viewing this as a threat, advisers should seize it as an opportunity, because as more companies consider buyouts and the complexity of the offerings grows, so does trustees’ need for advice.
Furthermore, when defined contribution solutions are put in as replacements, advisers’ expertise will again be necessary. So what does the adviser need to consider?
Nick Johnson, head of defined benefit risk management at Norwich Union says: “The corporate adviser needs to carry out the cost benefit analysis of a buyout, and, depending on their relationship with the trustee, tell them ‘this is the cost, this the deficit and this is how you can fund it.'”
With many companies unable to afford a full buyout, partial or phased buyouts may be more suitable.
These can be managed in several ways, with an increasingly popular approach being to just buyout the pensioners and leave deferred and active members with the scheme.
P&O bought out its pensioners in an £800m deal last year, the largest ever partial buyout.
Charlie Finch, a partner at Lane, Clark & Peacock, says: “Partial buyouts can be used to remove the risk but it does not close the scheme and set the members adrift. Many employers want to downsize a scheme but retain it for existing employees.”
A partial buyout could well be sufficient for many companies, Haasz says, if, for example, they find 80 per cent of the volatility is caused by 20 per cent of the members.
The tranches can now be spliced and diced in pretty much any way imaginable with insurers particularly willing to create bespoke arrangements for larger schemes.
The preparation before obtaining quotes from insurers is a rigourous process, Finch says. All of the scheme members’ data, including descriptions of benefits and increases, needs to be verified and then presented to the insurers in a suitable format.
The accuracy and quality of this data is of paramount importance, says Johnson, and bigger schemes can typically benefit from their broader mortality history.
“Bigger schemes have a lot more history and we can take account of that in the price,” he says. “With smaller schemes it is much more difficult to assess mortality risk if there are only one or two deaths a year.”
Price is of course the driver in many of these deals, particularly with small schemes. Finch says a “reasonable-sized” scheme of £100m will typically attract 10 quotes while even a £5m scheme will still attract four or five insurers. Specialist advisers are taking advantage of this and developing increasingly sophisticated means to take advantage of the fierce competition in the market to obtain the best price for their clients.
Generalising can be tricky, but Haasz says deals normally take 2-3 months at best to complete, but more complicated arrangements can take years to put in place.
The completion of the deal by no means has to equal the loss of a client. Although some larger firms prefer to employ specialist independent teams to remove any conflicts of interest their existing corporate adviser or scheme actuary may have, many companies are now offering bundled solutions.
Tony Read, marketing manager at Aegon Trustee Solutions, says companies offloading DB schemes will still need advice whether it be around a replacement or parallel defined contribution scheme or flexible benefits, for example.
“We are increasingly looking at corporate clients as a whole and pulling together the different parts of the company to provide a joined up solution,” he says.
NU also provides a bundled package and as Johnson warns: “If you don’t get paid for winding your client’s scheme up someone else will and you may end up losing the client altogether.”n
Focus: Tony Read, marketing manager, Aegon Trustee Solutions
Dealing in bulk
There has been much talk about the growth potential of the pensions buyout market following the glut of new entrants over the past two years and that is being supported by major deal flows.
The last five months have seen both the UK’s largest ever pension scheme transfer and the biggest ever partial transfer.
In February, Rothesay Life, a subsidiary of Goldman Sachs, bought out the £700m Rank Group final salary pension scheme.
Mercer was lead consultant on the deal and David Ellis, principal at the firm, says the transfer secures in full the accrued benefits of the 19,000 members, including mortality risk.
Last December, Paternoster took on shipping group P&O’s 11,000 pensioners in an £800m partial buyout.
Tony Read, marketing manager at Aegon Trustee Solutions, says: “The market has changed dramatically in a short space of time and if 2007 was the year of innovation, 2008 looks set to be the year when a lot of the bigger deals start coming through.”
There are indications that suggest a number of record-breaking deals are in the pipeline.
Prudential has been asked to quote on potential £1bn-£2bn transfer deals in the last month. Norwich Union has even been asked to provide a quote on a £4bn buyout.
Nick Johnson, head of defined benefit risk management at Norwich Union, says: “We started in 2006 and probably saw one or two deals over £100m. Now we have 10 and have just got a request from a £4bn scheme.”
With greater capacity and increasingly sophisticated buyout arrangements constantly being developed, expect a lot of newsflow from the sector this year.
Case study: Charlie Finch, partner, Lane, Clark & Peacock
The price of increasing competition
Corporate advisers are looking to take advantage of the increasingly fierce competition in the buyout market to drive down costs for their clients.
Internet auctions are becoming more commonly used with a range of strategies adopted to get the lowest price.
In March, Lane, Clark & Peacock held an internet auction for client Blue Prince Mushrooms’ £6.5m pension scheme.
Partner Charlie Finch says the pension scheme was split into three, between pensioners, young deferred and older deferred members. Four insurers quoted for the business and could see whether they were ranked first, second, third or fourth for each category. The deal on offer was a total buyout, so the insurer with the best overall offer was chosen.
There was a 30 minute auction with most of the bid action coming in the last five minutes.
Finch says: “Internet auctions work very well for small schemes where you need to demonstrate you got the best price. The process is transparent and provides an audit trail.”
LCP also held an online auction for Morgan Crucible’s pensioners in a £160m partial buyout last month.
The bid process had three rounds with each insurer knowing their own price but also how far they were from the best price.
“If the lead insurer does not know how far ahead they are, they are not under any pressure to cut their price to maintain their lead,” he says.
In this case, the lead insurer cut their price by 9 per cent in the first round and a couple of per cent in the following two rounds.
“Whereas a company typically paid a 30 per cent premium for a buyout a few years ago, Morgan Crucible made a 3 per cent profit on its buyout, compared to the scheme’s accounting position,” Finch adds.
The bulk buyout market is set to grow exponentially this year, creating massive opportunities for corporate advisers.
The sector, which has typically been valued at between £1bn and £2bn a year, could top £12bn in 2008, according to Paternoster, and many corporate advisers and employee benefits consultants have been quick to grasp the nettle.
The majority of the largest EBCs, such as Hewitt and Mercer, have operated specialist buyout teams for several years, while many corporate advisers have also successfully moved into this space.
But with the market set for such explosive growth, there is a real danger that some corporate advisers, who either lack the knowledge or confidence to advise on bulk buyouts, could lose clients as their corporate customers are forced to look elsewhere for this specialist advice.
Much of the growth in the buyout market is being driven by the explosion of new entrants, ranging from recently-launched insurers, including Paternoster and Synesis Life, to overseas players like MetLife and more established players, such as Aegon, Legal & General and Prudential.
The newer players have been a key driver behind much of the innovation seen in the sector over the past two years, bringing increasingly sophisticated risk management solutions, such as partial buyouts, to market. The increased competition has also driven down prices and increased capacity, opening up the world of bulk buyouts to a much wider range of companies than ever before.
“The buyout market has changed dramatically in the past 12-18 months,” says Ian Aley, business development director at Paternoster. “A couple of years ago there were only a small number of insurance companies and a one-size-fits-all approach. Now, there are a lot more insurers and a lot more offerings available.”
The growth of the market has also created a domino effect, says Steven Haasz, managing director of corporate solutions at Prudential. He says more and more companies are now willing to consider buyouts as an effective means of risk management after seeing respected peers complete deals.
“At the start, companies looking at buyouts tended to have little choice as their covenants were in danger or they were insolvent. Now we are seeing solvent, well-run businesses actively choosing to remove this volatility from their balance sheets,” Haasz says.
But rather than viewing this as a threat, advisers should seize it as an opportunity, because as more companies consider buyouts and the complexity of the offerings grows, so does trustees’ need for advice.
Furthermore, when defined contribution solutions are put in as replacements, advisers’ expertise will again be necessary. So what does the adviser need to consider?
Nick Johnson, head of defined benefit risk management at Norwich Union says: “The corporate adviser needs to carry out the cost benefit analysis of a buyout, and, depending on their relationship with the trustee, tell them ‘this is the cost, this the deficit and this is how you can fund it.'”
With many companies unable to afford a full buyout, partial or phased buyouts may be more suitable.
These can be managed in several ways, with an increasingly popular approach being to just buyout the pensioners and leave deferred and active members with the scheme.
P&O bought out its pensioners in an £800m deal last year, the largest ever partial buyout.
Charlie Finch, a partner at Lane, Clark & Peacock, says: “Partial buyouts can be used to remove the risk but it does not close the scheme and set the members adrift. Many employers want to downsize a scheme but retain it for existing employees.”
A partial buyout could well be sufficient for many companies, Haasz says, if, for example, they find 80 per cent of the volatility is caused by 20 per cent of the members.
The tranches can now be spliced and diced in pretty much any way imaginable with insurers particularly willing to create bespoke arrangements for larger schemes.
The preparation before obtaining quotes from insurers is a rigourous process, Finch says. All of the scheme members’ data, including descriptions of benefits and increases, needs to be verified and then presented to the insurers in a suitable format.
The accuracy and quality of this data is of paramount importance, says Johnson, and bigger schemes can typically benefit from their broader mortality history.
“Bigger schemes have a lot more history and we can take account of that in the price,” he says. “With smaller schemes it is much more difficult to assess mortality risk if there are only one or two deaths a year.”
Price is of course the driver in many of these deals, particularly with small schemes. Finch says a “reasonable-sized” scheme of £100m will typically attract 10 quotes while even a £5m scheme will still attract four or five insurers. Specialist advisers are taking advantage of this and developing increasingly sophisticated means to take advantage of the fierce competition in the market to obtain the best price for their clients.
Generalising can be tricky, but Haasz says deals normally take 2-3 months at best to complete, but more complicated arrangements can take years to put in place.
The completion of the deal by no means has to equal the loss of a client. Although some larger firms prefer to employ specialist independent teams to remove any conflicts of interest their existing corporate adviser or scheme actuary may have, many companies are now offering bundled solutions.
Tony Read, marketing manager at Aegon Trustee Solutions, says companies offloading DB schemes will still need advice whether it be around a replacement or parallel defined contribution scheme or flexible benefits, for example.
“We are increasingly looking at corporate clients as a whole and pulling together the different parts of the company to provide a joined up solution,” he says.
NU also provides a bundled package and as Johnson warns: “If you don’t get paid for winding your client’s scheme up someone else will and you may end up losing the client altogether.”n
Focus: Tony Read, marketing manager, Aegon Trustee Solutions
Dealing in bulk
There has been much talk about the growth potential of the pensions buyout market following the glut of new entrants over the past two years and that is being supported by major deal flows.
The last five months have seen both the UK’s largest ever pension scheme transfer and the biggest ever partial transfer.
In February, Rothesay Life, a subsidiary of Goldman Sachs, bought out the £700m Rank Group final salary pension scheme.
Mercer was lead consultant on the deal and David Ellis, principal at the firm, says the transfer secures in full the accrued benefits of the 19,000 members, including mortality risk.
Last December, Paternoster took on shipping group P&O’s 11,000 pensioners in an £800m partial buyout.
Tony Read, marketing manager at Aegon Trustee Solutions, says: “The market has changed dramatically in a short space of time and if 2007 was the year of innovation, 2008 looks set to be the year when a lot of the bigger deals start coming through.”
There are indications that suggest a number of record-breaking deals are in the pipeline.
Prudential has been asked to quote on potential £1bn-£2bn transfer deals in the last month. Norwich Union has even been asked to provide a quote on a £4bn buyout.
Nick Johnson, head of defined benefit risk management at Norwich Union, says: “We started in 2006 and probably saw one or two deals over £100m. Now we have 10 and have just got a request from a £4bn scheme.”
With greater capacity and increasingly sophisticated buyout arrangements constantly being developed, expect a lot of newsflow from the sector this year.
Case study: Charlie Finch, partner, Lane, Clark & Peacock
The price of increasing competition
Corporate advisers are looking to take advantage of the increasingly fierce competition in the buyout market to drive down costs for their clients.
Internet auctions are becoming more commonly used with a range of strategies adopted to get the lowest price.
In March, Lane, Clark & Peacock held an internet auction for client Blue Prince Mushrooms’ £6.5m pension scheme.
Partner Charlie Finch says the pension scheme was split into three, between pensioners, young deferred and older deferred members. Four insurers quoted for the business and could see whether they were ranked first, second, third or fourth for each category. The deal on offer was a total buyout, so the insurer with the best overall offer was chosen.
There was a 30 minute auction with most of the bid action coming in the last five minutes.
Finch says: “Internet auctions work very well for small schemes where you need to demonstrate you got the best price. The process is transparent and provides an audit trail.”
LCP also held an online auction for Morgan Crucible’s pensioners in a £160m partial buyout last month.
The bid process had three rounds with each insurer knowing their own price but also how far they were from the best price.
“If the lead insurer does not know how far ahead they are, they are not under any pressure to cut their price to maintain their lead,” he says.
In this case, the lead insurer cut their price by 9 per cent in the first round and a couple of per cent in the following two rounds.
“Whereas a company typically paid a 30 per cent premium for a buyout a few years ago, Morgan Crucible made a 3 per cent profit on its buyout, compared to the scheme’s accounting position,” Finch adds.
