The latest figures from Pension Insurance Corporation’s Pension Risk Tracker Index show that interest in pension insurance buy-ins continues to outstrip interest in buyouts, driven primarily by economic factors, as chart 3 of the accompanying pdf demonstrates. Overall, the market for pension insurance has started strongly in 2013, with more than 50 schemes, with liabilities in excess of £20 billion, actively looking at a pension insurance transaction.
Whilst there has been a slight dip in affordability for buy-ins, at least since the highs of last summer, on a historic basis they remain good value. Prices remain close to liabilities, valued on gilt yields, therefore requiring little or no additional funding from the sponsor (chart 4).
Should gilt yields rise, due to shifting economic circumstances or a change in policy, this situation may slowly unwind, bringing pension fund liabilities down and improving affordability for buyouts. Buy-ins may therefore not lead the pension insurance market in 2013, as they did in 2012, pegged to ultra-low gilt yields.
A key point to consider is that the Bank of England will need to issue tens of billions of Pounds of new gilts this year to finance the budget deficit. What makes this worthy of note is that this is likely to be against a background without the support mechanism of QE in place.
This means that each gilt auction will be more of a test of the market’s view of the UK as a safe haven and growth prospects. If the UK’s status as a safe haven weakens, due to poor GDP growth prospects and a possible further credit downgrade, yields may rise further and faster than anticipated.
In a narrow sense rising yields will help pension funds as they see liabilities come down. However, in the absence of economic recovery this is unlikely to benefit them as they continue to rely on the strength of their corporate sponsor, who are themselves dependant on the health of the wider economy.
David Collinson, co-head of business origination at Pension Insurance Corporation, said: “Like most investors, pension schemes have found it challenging optimising the timing of de-risking to crystallise gains during market highs. The consequence of this is that over the past few weeks we have seen a rash of pension schemes or their sponsors reporting large increases in deficits.
“Should bond yields rise over the next few months, some pension funds may find themselves in a position to de-risk and they should consider acting on this opportunity whilst they have the chance. Windows of this nature can be short-lived and as we have seen, may not come around again very quickly. Trustees should be laying the groundwork for their plans well in advance.”
To download the Pension Risk Tracker Index show please click below.
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