The past six months have seen £4.1bn (€5.2bn) worth of insured buyouts, and some estimate the total deal pipeline at £25bn, with at least 10 FTSE100 companies considering a buyout.
“We’ve seen a sevenfold increase in transaction volumes over the past six months against the preceding six months, including much larger schemes coming to market,” said Clive Wellsteed, head of LCP’s pensions buyout team (which advised on half the £50m-plus transactions in 2007). “We expect to see the first major FTSE100 scheme complete this year.”
Buyout pricing is compelling: insurance companies’ economies of scale allow more sophisticated liability-driven investment strategies than many pension funds; liabilities are growing thanks to more conservative longevity and accounting standards; the credit contraction has enabled insurers to use widening credit spreads to slash prices; and new entrants have made competition for early market share intense. Goldman Sachs has made its mark with February’s £700m Rank deal, and LCP anticipates more activity from the investment banks this year. Meanwhile, one of the original duopoly in the business – Prudential – pulled out altogether, citing uneconomic pricing.
“The credit crunch and the ‘land grab’ are short–term price drivers,” said Mr Wellsteed, “so current pricing could represent a window of opportunity for sponsors.” Those sponsors may encounter resistance – not from trustees, for whom buyout is increasingly an option, but from the consultants, actuaries and asset managers who have a stake in the fee-generating DB business.
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