Bulk Purchase Annuity Market Booming as Pension Deficits Swell

The UK pension market is in tough shape post financial crisis.

According to a Bloomberg article, "about 87 percent of the U.K.’s 7,400 final salary pension plans are in deficit following the financial crisis."

This crisis offers an unprecendented opportunity for companies that insure the pension liabilities of private corporations through bulk purchase annuities.

“The bulk-purchase annuity market is going to continue to be a good market because companies want to get their pension funds off their balance sheet,” said Trevor Moss, a London- based analyst at MF Global Securities Ltd. who tracks insurers. Pension liabilities add “enormous volatility to their balance sheet and profit and loss accounts, so they’re all going to find ways to take that risk away.”

One insurer of pension payouts, Pension Corp., is set to raise a meaningful amount of capital through a public share offering in 2010.

The scale of the problem and opportunity--which basically boils down to the transfer of longevity risk from corporate balance sheets to private insurers--are massive and will require significant amounts of additional capital:

“There’s not enough capacity in the global insurance and reinsurance industry to transfer the longevity risk of corporate pension plans in the U.K. alone,” he said. “It’s an overwhelming problem that you can’t solve without bringing multiples of the current capital that exist in the insurance industry.”

Source: Bloomberg

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