Retirement fund buyout boys fail to do much business

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They were the new kids on the block – armed with bags of cash ready to bail UK plc out of the looming pensions imbroglio, for a price. They offered companies a way out of their deficit crises, but things haven't exactly gone to plan for the pension buyout boys.

The market for shifting pension fund risk off a company's books and on to those of an insurer began around four years ago with a plethora of new companies launching.

These were: Synesis Life, founded by Isabel Hudson, formerly of Prudential; Pension Corporation, led by Edmund Truell; Pensions First; Paternoster, founded by Prudential's former UK boss Mark Wood; Tactica Insurance, founded by City veteran Stefan Allesch-Taylor and the former Bank of Scotland CEO Sir Peter Burt; Lucida, founded by Prudential's former CEO, Jonathan Bloomer; and Rothesay Life, backed by Goldman Sachs. Legal & General, the FTSE 100 insurer, is also a player in this arena.

But success has been patchy at best. Synesis Life failed to complete a single deal and was gobbled up by Pension Corporation. Pensions First has done nothing, posting a loss of more than £4m according to its latest accounts. Tactica, which said it planned to raise £1bn worth of equity at its launch, is notable only for a dearth of deals; while Lucida and Rothesay Life have been limited to a couple of buyouts.

Only Paternoster, which has amassed £2.7bn worth of funds, and Pension Corporation, which wrote £1.6bn worth of new buyout business last year, had anything to shout about.

However, the pair have recently admitted to merger talks that ended in failure, with Paternoster now closed to new business.

Faced with the effective short-run closure of the buyout market and the consequent inability to offload investment risk, many pension funds are looking to ditch so-called "longevity risk" – the risk that pensioners who are being paid by funds live longer than predicted.

Last month Credit Suisse underwrote Britain's first-ever longevity swap, taking on risk from the engin- eering company Babcock.

A raft of other banks, including JP Morgan, as well as traditional insurers such as Swiss Re, are thought to be readying to announce similar deals. Both Paternoster and Pension Corporation have stated that they have significant longevity swap business to transact.

Despite only one transaction yet being completed, pensions experts Hewitt Associates have predicted that as many of six deals, worth as much as £5bn, could be completed this year.

According to Hewitt's Martin Bird: "We expect to see a surge of interest in completing longevity-swap deals now the 'first mover' barrier has been taken down. As a result, I would expect a minimum of six deals over the next year, initially focusing on the larger end of the market, leading to its expansion to a value of over £5bn."

But one City source warned: "I'd caution pension funds jumping on this bandwagon too quickly. There aren't that many people with the skill and knowledge to put these deals on. There's no such thing as a free lunch, and people should remember that."

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