£4 billion buy-ins and £3.5 billion longevity swaps

The latest analysis of the risk transfer market for final salary pension schemes carried out by Hymans Robertson, the UK's leading independent pension and benefits consultancy, shows that the value of buy-outs, buy-ins and longevity swap deals struck during the 2009 has been over £7.5 billion.

James Mullins, a senior liability management specialist at Hymans Robertson, commented: "During the fourth quarter of this year, the value of traditional buy-out / buy-in deals struck has increased again to around £1.5 billion and the longevity swap market saw another significant deal as Swiss Re confirmed it was the counterparty behind a £750m longevity swap with the Royal County of Berkshire Pension Fund.

"In total, this means that the risks associated with around £2.25 billion of pension scheme liabilities were passed across to insurance companies and banks during the fourth quarter of 2009 alone and over £7.5 billion since the start of 2009."

And, with six working days remaining before the end of 2009, there could be more to come this year. James Mullin said: "At least one of the longevity swap providers still has "exclusivity" on another longevity swap deal worth well in excess of £1 billion, which is due to complete early in the New Year."

Fourth quarter highlights

The £370m CDC Pension Scheme buy-in with Rothesay Life was the first significant risk transfer deal by a public sector pension scheme.

Furthermore, this was the first deal to have been automatically completed once a pre-agreed trigger point has been met.

James Mullins commented: "We fully expect CDC to be the first of many pension schemes to make use of pre-agreed trigger points in this way."

Cadbury became the biggest UK company whose pension scheme has completed a significant buy-in deal when the Cadbury Pension Fund completed a £500m buy-in deal with Pension Insurance Corporation.

James Mullins commented: "This deal is the fifth largest buy-in to date and gives Pension Insurance Corporation a strong chance of capturing top spot for the largest market share (by value) of any of the insurers during 2009."

Swiss Re became the third provider to complete a longevity swap with a deal with the Royal County of Berkshire Pension Fund which covers £750m of their pensioner liabilities.  This was the first longevity swap deal by a public sector pension scheme.

James Mullins commented: "It is likely that some highly material longevity swaps will be completed early in the New Year and we fully expect longevity hedging to continue to receive significant interest during 2010 and beyond. We believe that longevity hedging deals will be most common for large pension schemes who believe that the best way for them to de-risk is to carry out a DIY buy-in; that is to use interest, inflation and longevity swaps directly to reduce risk.

"In order to assess the potential attractiveness of a longevity swap, companies and trustees need to apply sophisticated modelling techniques to accurately understand their own scheme's longevity risk based on the unique characteristics of their membership."

The new deals completed during Q4 2009 mean that the buy-in/buy-out market continues to be dominated by Pension Insurance Corporation, Legal & General, MetLife, Lucida and Rothesay Life during 2009.