Syndication mainly works in one of two ways. Schemes can work with multiple providers to agree a structure where the selected benefits are divided between them. This may require lengthy negotiation and due diligence before agreements are met. Alternatively, a lead provider may be appointed to take on the full liability and then reinsure segments with other providers on behalf of the scheme.
The first real example of this approach was for the Rank pension scheme, where Rothesay Life, the Goldman Sachs Life office, took on £700 million worth of liability and subsequently agreed to reinsure the pensioner liabilities of around £300 million with Prudential.
Partnering benefits from the combined strength and experience of different companies working together to develop a ‘joint bid’. By utilising their different skills and experience, it’s more likely that providers working in partnership can develop a fully tailored and more cost effective solution than a single provider. Prudential and Goldman Sachs, for example, are considering opportunities for future cooperation to provide joint solutions in selected situations.
But with such a drastic increase in large deals there is even talk in some corners about the possibility of providers reaching saturation point. This may sound far fetched, yet it could happen. Even with a flood of new providers to the market, there may not be enough supply to meet the increasing demand. To put figures into perspective, even if the market does indeed exceed the predicted £10billion this year, this still reflects less than one per cent of the potential market. Bearing in mind buyout sales have already accelerated by over 800 per cent in just two years, it’s obvious to see why some analysts are scratching their heads about how the other 99 per cent of the market will be supported. Realistically, not all schemes will be looking to buyout, so for many this will not be an immediate issue. Yet, even if pension schemes decide to transact the equivalent of just 2 per cent of that potential market in the next year, sales will need to double to over £20 billion to support those needs. In that scenario, saturation is indeed possible – even if on a temporary basis. Let us not forget that buyouts are a risk management business and providers need to be clear about the level of risk they take on, especially as buyouts are capital intensive.
What would all this mean? Well, if there were a slow-down due to market saturation, a number of scenarios may emerge. For one, the market would become less competitive than we have seen in the last 18 months. Providers may become more choosy about the type of business they take on – and the price at which they are prepared to take on such risks. For some schemes, buyout may become difficult to achieve, or they may not be able to transact with their ‘preferred provider’, should they have one.
On one hand, there may be further collaboration to provide joint solutions or syndication of the larger risks, while on the other we may also see a degree of polarisation, with some providers offering specialist support for the smaller end of the market.
The door could also be opened to additional providers joining the market, as prices become more attractive and established providers reach capacity. Additional due diligence will be required as the capabilities of further new entrants are assessed.
There may also be a focus on further innovation and alternative risk management solutions, especially solutions that are not directly affected by the volume of buyout business. For example there could be an increase in enhanced transfer value exercises for deferred members, as the attention shifts away from pensioner buy-ins. Either way, the defined benefit pension market looks set for interesting times.