Pension scheme liability buy-out market approaching maximum capacity, expert warns

Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com, said that banks were already looking to reduce their exposure to corporate pension debt amidst a "perfect storm" of tougher capital requirements and low bond yields pushing up the price of bulk annuity deals.

"We can expect to reach a point fairly soon when there will be far more pension schemes wanting to buy out than there is capacity in the market to absorb them," he said. "Some, perhaps most, of those schemes are going to find their plans thwarted. The successful schemes will be the schemes that are ready to move fast."

"Working alongside pension scheme trustees, numerous companies have been adopting investment and funding strategies designed to ready their schemes for buy-out. Many middle-market companies have been pursuing this strategy and are likely to come to the market at the same time," he said.

However, these companies would find fewer options open to them to insure them against the risks of poor investment returns or pension scheme members living longer than expected, Meeks said. Earlier this month, the Financial Times reported that Goldman Sachs was planning to sell its majority stake in its London-based specialist pensions subsidiary, Rothesay Life. Doing so would make the Wall Street bank the latest to take action to reduce its exposure to the market. International banks including Credit Suisse, UBS and Nomura have made or investigated similar measures, according to the Financial Times.

"Basel III reforms are having an impact on banks' interest in the insurers that take on pension liabilities," Meeks said. "The banks' stance is a symptom of a drop in supply by insurers, just when demand is about to take off."

"The goal of achieving buy-outs seems to be increasingly illusory, and it may be that alternative options need to be contemplated. Self-sufficiency is a real alternative for many businesses and need not be a deterrent to external investors," he said.

The Basel III international banking agreement will require banks to hold additional, better quality capital against their liabilities. It will be introduced in the EU under the new Capital Requirements Directive (CRD IV), which will come into force on 1 January 2014.

Buy-outs effectively relieve companies of the investment and longevity risks associated with historical defined benefit (DB) pension schemes, which are schemes that promise a set level of pension once a member reaches retirement age regardless of the performance of the underlying investment. Prominent companies including Tate and Lyle and Cookson are among several to have taken out such schemes as a way of minimising liabilities to better attract investors.

The buy-out market in the UK is expected to hit a five-year high this year. Insurers completed transactions worth £3 billion over the first half of 2013, compared with £4.5bn in the whole of 2012.