Consultancy firm Watson Wyatt thinks companies will be able to shed their pension obligations at a lower cost than would be required by a fully authorised insurance company in the future.
Watson Wyatt believes that the recent acquisition of the pension arrangements of Thomson Regional Newspapers by Citigroup is a further signal that this could be the way the pensions 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 is well placed to use its financial expertise to manage the scheme.
Watson Wyatt 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 alternative solutions being put to scheme sponsors and trustees.
He says: “To begin with, the quoting activity was all around full buyout of all liabilities, evolving to bids for buyout of a specific group, such as pensioners. There are a number of steps that can be taken to reduce the cost of either an insured or non-insured buyout and we are seeing a very high level of interest from clients in doing this, either as an exercise on its own terms or as a part of an integrated buyout project.
“The main stumbling block in the past has been price. If getting liabilities off the balance sheet can be made a bit cheaper than buy-out, with the new sponsor having a top-notch covenant that keeps trustees happy, then we wouldn’t be surprised to see quite a few trades.”