Plan Sponsors Urged to Move Quickly to Exploit Flat Costs For Purchasing Annuities

26 July 2012 (PLANSPONSOREurope.com) - Plan sponsors should move quickly to exploit trends around flat costs for purchasing annuities for pensioner liabilities, according to Aon Hewitt.

Aon Hewitt’s Bulk Annuity Monitor says an opportunity to trade gilts for an annuity covering pensioners (a buy-in) remains, with pricing looking attractive compared to both funding reserves and the implied yields from retaining the gilts.

However the update warns market conditions may be about to change as the current distortions to the gilt market ease, so this opportunity - to achieve greater risk protection from the same amount of assets - should be considered promptly.

The report says: “Relative costs for purchasing annuities for pensioner liabilities has been flat during June 2012 as credit spreads have been steady.  For a typical pensioner transaction, only a small additional premium over the funding reserve may be required, and the comparison may be even more favourable for older pensioners.

“Pensioner annuities have an implied yield which is slightly higher than that available on typical gilts and swaps. This implies that if these assets are used to purchase annuities in respect of pensioner liabilities, there is a degree of "free" risk removal as the scheme has hedged both longevity and inflation risk without reducing expected returns.

“For schemes as a whole, the gap against meeting full buy-out cost tends to remain substantial, as some positive swings in the equity market have not counteracted the effect of the low yield environment. Exceptionally, schemes that have been invested largely in bonds or annuities over the past year will have seen a more stable, and in some cases improved, funding position.”

PLANSPONSOREurope Staff
editors@plansponsoreurope.com