Market for pension risk will halve this year

The market for transferring pension scheme risk to an insurance company will fall to £4bn this year as the full force of the financial crisis hits home, according to actuaries.

That would be a drop of almost half from the £7.9bn of buyout business written in 2008. It would still exceed the £2.9bn written in 2007.

The prediction was made by Lane Clark & Peacock LLP (LCP) in a new report.

Charlie Finch, partner in LCP's buyout practice, said: ‘After the explosive growth in pension buyouts last year, the financial crisis has slammed on the brakes for now. Insurers and pension schemes have taken a step back as they wait to see what impact the crisis will have.

‘It would be wrong to think that the markets are dead. Fundamentally, there is no let-up in demand for eliminating pension risk. For many pension schemes, it is not a question of whether they will buy out, but rather a question of when. As a result, we expect buyout activity will pick up in the second half of the year as the financial crisis recedes. Careful preparation now will allow pension schemes to move quickly as opportunities arise.’

LCP also predicted growth in the longevity protection market, which is when an employer transfers the risk that members live longer than expected. This followed the announcement by Babcock International of the first longevity swap by a UK pension scheme.

Charlie Finch added: ‘The birth of the longevity protection market is well timed to help larger pension schemes take a key risk off the table with six FTSE 100 companies having already obtained longevity quotations. Competition between providers seeking to establish themselves means that many larger pension schemes can purchase longevity protection at limited additional cost relative to present funding plans.’