Pension scheme buy-outs set to rise

The number of companies offloading their pension schemes to insurers has accelerated sharply over the past six months and looks set to continue to grow, a report said today.

Actuarial consultancy Lane Clark & Peacock (LCP) is predicting the pension buy-out market will exceed £10bn this year, up from £2.9bn in 2007.

In the six months to March 31, schemes worth £4.1bn were sold to insurers - seven times the amount sold in the previous six months.

The group, which analysed data from leading insurance companies, said at least 10 FTSE 100 companies were currently evaluating quotations to have some or all of their pension scheme liabilities bought out during 2008.

It said the first major FTSE 100 pension scheme buy-out was inevitable and "likely to be imminent".

Several big firms including P&O, Emap and Rank have been involved in buy-outs since the start of 2007.

The practice enables companies to transfer their pensions liabilities to an insurer for a one-off cost.

The insurer gets the assets of the scheme, plus a premium, and then controls it, paying out pensions to members as they become due.

Competition among insurers means those premiums have been falling, making a buy-out look more attractive to companies concerned about future costs.

As life expectancy increases, companies are finding it more expensive to offer pensions to their employees.

In recent years many big companies have closed.....continued below

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their final salary schemes, which offer a guaranteed pay out, to new employees, replacing them with cheaper money purchase schemes. The payout from these is dependent on the performance of the funds in which the scheme has invested.

However, in most cases existing members have kept hold of their entitlements, meaning schemes still face the cost of paying out when they retire.

Clive Wellsteed, who heads the pension buyouts practice at LCP, said: "LCP sees the decision of whether to pass risk to an insurance company through buyout as simply a question of timing. Most defined benefit pension schemes are closed to new members and were already expecting to buy-out with an insurer in the long term.

"Favourable pricing now provides an opportunity to transfer some or all of the risk away much sooner. It's not a question of if these schemes will buy out, but simply a question of when."

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