Dec 22, 2008
LONDON, 22 December 2008 – The insurance buyout market for defined benefit (DB) pension schemes is expected to fail to hit industry forecasts for 2008, falling £2 billion shy of the forecasted year-end £10 billion mark. According to Aon Consulting, a leading pension, benefits and HR consulting firm, the anticipated growth in business did not materialise in the second half of the year due to the global economic crisis sucking liquidity out of the market. Final definitive numbers will be published by Aon Consulting in early 2009.
Aon reports that a major factor for the slowdown relates to corporate bonds, which represent one of the key asset classes that insurers use to back annuities. The lack of liquidity and uncertainty around pricing and increased default risk for corporate bonds had a knock-on effect on bulk annuities from mid-September, with insurers withdrawing guarantees on the assumptions underlying quotations, and being much less prepared to accept any "out of market" risk. Some of the insurers, who had previously been very competitive, increased their pricing significantly, and initially it became difficult to trade.
Aon maintains that the rationale for securing a bulk annuity for pensioner liabilities is still valid for certain schemes, provided the pricing and terms remains attractive. However, where schemes need to realise growth assets (for example equities and property) to pay the premium, they are often reluctant to sell and therefore lock in at current depressed values. In the short term, therefore, transactions are most likely to proceed involving schemes that already hold significant bond assets against the liabilities that are to be secured.
Commenting on the market trends, Paul Belok, principal & actuary at Aon Consulting, said: “The bulk annuity market has inevitably been affected by the financial tsunami hitting financial markets over the last few months. Many pension schemes which were looking at the bulk annuity market earlier in the year are now deferring their review until markets have settled. This has led to total figures for the year falling shy of the much anticipated market growth for 2008.
“More recently, however, we have seen two or three insurers emerge with pricing that continues to offer value, and deals at the smaller and medium end have continued to transact. In the last week we have also seen the announcement of a scheme being bought out for some £1.1 billion – without this deal, however, the fourth quarter numbers would have been very disappointing.
“A number of schemes will perhaps feel that they missed out on a great opportunity to de-risk earlier in the year, which highlights the need for schemes to work with their advisers to define their future road map. In particular, schemes need to identify the triggers that would lead them to transact in the bulk annuity market, and to have prepared the way so that they can react swiftly if and when these circumstances arise in future.”
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Aon Consulting Worldwide is among the top global human capital consulting firms, with 2007 revenues of US$1.352 billion and more than 6,000 professionals in 117 offices worldwide. Aon Consulting is shaping the workplace of the future through benefits, talent management and rewards strategies and solutions. Aon Consulting was named the best employee benefit consulting firm by the readers of Business Insurance magazine in 2006, 2007 and 2008. For more information on Aon, please visit http://aon.mediaroom.com.
Aon Corporation (NYSE: AOC) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital consulting. Through its more than 36,000 colleagues worldwide, Aon readily delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Our industry-leading global resources, technical expertise and industry knowledge are delivered locally through more than 500 offices in more than 120 countries. Aon was named the world's best broker by Euromoney magazine's 2008 Insurance Survey. In 2008, Aon ranked highest on the Business Insurance ranking of the world's largest insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues. Aon also was ranked by A.M. Best as the number one insurance broker based on brokerage revenues in 2007 and 2008, and was voted best insurance intermediary, best reinsurance intermediary, and best employee benefits consulting firm in 2007 and 2008 by the readers of Business Insurance. Sign up to receive Aon news alerts by email or RSS feed at: http://aon.mediaroom.com/index.php?s=58.
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