Pension scheme buy-outs to rise

Pension scheme changes are often very controversial

Some of the UK's biggest employers are likely to offload their pension schemes in the coming year, according to the actuaries Lane Clark and Peacock (LCP).

Their report on pension scheme buy-outs says an increasing number of firms are preparing to do this, including at least 10 firms in the FTSE 100.

The idea has become popular among employers looking for ways to cut the risk of final salary pension schemes.

Firms that have already taken this step are P&O, Emap and Morgan Crucible.

"The market for transferring pension scheme risk to an insurance company has accelerated sharply over the past six months and is expected to grow rapidly from here," said LCP.

"At least 10 FTSE-100 pension schemes are evaluating comprehensive quotations to buy out some or all of their pension liabilities during 2008.

"The pension buyout market in 2008 will exceed £10bn, achieving a fourfold increase on 2007 volumes," it added.

Even so, this will still amount to less than 1% of the value of all the assets held in private sector final salary pension schemes.

Risk

The sort of buy-outs under consideration involve a solvent employer paying an insurance company to take over the responsibility of running its pension scheme, which has usually been closed to new members.

In exchange for the assets, and a premium on top, the insurer promises to pay the pensions of existing pensioners and, in some cases too, the pensions of contributing and deferred scheme members who have yet to retire.

The employer gains by getting rid of the risk that the scheme's investments might go wrong, or the risk of its pensioners and employees living longer than it expected.

For its part, the insurer hopes to make money through economies of scale and by using more sophisticated investment strategies.

There are currently 11 insurers in this market, according to LCP, most of which have shown an interest in this sort of business only in the past two years.

Since the start of 2007, there have been 12 buy-outs which were worth more than £100m each.

Approval

In the past, pension schemes were only bought out when they were wound up after an employer had gone bust.

Sensible and effective mechanisms for securing the pensions promise Mike O'Brien, pensions minister

But increasingly, employers have been offered a buy-out as a way of removing the risk they face that the long-term cost of funding their schemes may rise uncontrollably.

One reason for them becoming more popular is that the cost of achieving such a deal has reduced in the past year.

This is partly because many more schemes are now fully funded, at least for paying their existing pensioners, and would therefore not require a large top-up if those members were transferred.

The government has given its approval in principle to this new type of arrangement. The pensions minister Mike O'Brien recently said it contained "sensible and effective mechanisms for securing the pensions promise".

But the authorities have taken a dim view of another type of buy-out, in which the pension scheme is taken over by a firm that is not a regulated insurer.

Following worries about what might happen to the Telent pension scheme, formerly the pension scheme of GEC and Marconi, after it was bought by the Pensions Corporation, the Pensions Regulator was given powers to intervene.

The Regulator can now demand that the new owner of a pension scheme should top it up if it is feared that the changed ownership and control of the scheme might weaken the level of security for the members.