The service compares the cost of a whole pension buy-out, where the fund transfers its liabilities to an insurer, the cost of a buy-in policy to hedge the liabilities associated with older members, and the cost of using gilts or swaps to hedge those liabilities.
For a defined benefit pension scheme considering the best way to derisk, these considerations are vital, but until now, it has not been easy to get a picture of how much the various options cost.
“Some other people track buy-in and buy-out prices in a simplistic way, but the important question is how those prices move in relation to other ways of hedging your liabilities,” said James Mullins, head of buy-out solutions at Hymans Robertson.
He cited the figures from the first issue of the monitoring service. “Due to the greater level of risk reduction achieved, full buy-out is typically more expensive than using gilts or swaps to hedge liabilities. However, this additional cost has fallen in recent months, making full scheme buy-out relatively more attractive compared to holding a swaps portfolio than it had been throughout 2010 and the first half of 2011.”
The accompanying analysis suggests there are also “some interesting opportunities in the buy-in market, particularly for schemes holding gilts as part of their hedging portfolio. Exchanging some of these gilts for a buy-in could generate value and increase hedging efficiency.”
Assessing the market price of pension deals is tricky, because there are relatively few deals and each has unique characteristics. The consultancy takes monthly figures from the main insurers in the market and “calibrates the averages” to adjust for anomalies. “It’s never going to be perfect, but we’re pretty confident of our numbers,” said Mr Mullins.
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