Global trend to transfer pension risk is accelerating

The trend for defined benefit (DB) pension funds to transfer pension risk to third parties is both global and accelerating, according to consultants Mercer.

Low interest rates, volatile equity markets, rising life expectancy and the economic downturn are driving this trend, and forcing company finance executives to find ways to shed pension liabilities.

Mercer said its figures showed that in the UK there has been a large increase in the size of bulk annuity and longevity swap deals, with nearly 100 transactions of over £50 million in size, with a combined value of £33 billion, taking place since 2007. The number of deals in the USA and Europe is also rising and Mercer global head of DB risk and senior partner, Frank Oldham, commented: “The market for transferring pension risk away from plan sponsors has developed significantly in the UK in recent years with the number, size and sophistication of these deals all moving on in leaps and bounds. Other European countries, particularly the Netherlands and Ireland, are also starting to see more activity and interest in this area, and it was therefore just a matter of time before these developments transferred to a latent US market.”

According to Mercer, a global market in longevity reinsurance is starting to develop, with US insurers interested in business from UK DB funds. It added that Dutch firm AEGON has also transacted a longevity swap and a Canadian insurer is open for longevity business. Another potentially significant development was the positive market reaction to one of the first bulk annuity deals in the US by General Motors, which it said could open the door for further deals by US plan sponsors previously concerned about bad publicity.