Watson Wyatt believes many companies will be able to remove their pension liabilities from their balance sheets at a lower cost than would be required by a fully authorised insurance company.
The actuarial consultancy says the recent acquisition of the pension arrangements of Thomson Regional Newspapers by Citigroup is a further signal that this could be the way the pension buyout market is going.
The Citigroup acquisition follows the acquisition of Threshers by a consortium led by Duke Street where the operating capability was sold on, leaving just the scheme with the consortium.
Watson Wyatt says that while these appear quite different types of transaction, they both separate a pension scheme from its former sponsor, leaving the scheme as the obligation of a new sponsor which will take over the running of the scheme. Head of corporate consulting Andrew Reid says: “What is really interesting about these deals is the fact that the acquirer seems willing to put some or all of their covenant at risk in order to finance the pension scheme.
“This is very different to the early abandonment proposals that were suggested by some of the new participants in the buy-out market, and shows the impact of The Pensions Regulator’s warning that abandonment without access to additional capital was unlikely to be in members’ best interests.
“If financially strong institutions are prepared to use their covenant to support these transactions, the potential demand is huge. It will be fascinating to see how much market capacity there is for this sort of activity.”
Reid says that he and his colleagues are seeing a wide variety of new developments in the pension buyout market with companies starting to buy out specific tranches of scheme members, such as just those in retirement, rather than full scheme buyouts.
He says: “The main stumbling block in the past has been price. If getting liabilities off the balance sheet can be made a bit cheaper than full buyout, with the new sponsor having a top-notch covenant that keeps trustees happy, then we would not be surprised to see quite a few trades.”