Q1.  The first quarter of 2008 saw £2.3bn of bulk annuities written, another record quarter demonstrating that the buyout market has now taken off.  What is your estimate for the size of the bulk annuity market overall of 2008?  Will we see the first £1bn plus transaction?

A1.  Interest in buyout has soared, driven by the coverage given to deals done in the last 6 months and by concern over possible action to require trustees to set more prudent assumptions in funding DB schemes.  There is a real buzz about the topic nowadays.  Even if only a fraction of the current pipeline transacts this year, we could see deals up to £10bn during 2008.  Some commentators suggest up to £20bn could transact, but this is probably hype – deals do not happen overnight.  Large schemes are no different from smaller schemes in their desire to reduce risks and many are making enquiries about solutions and costs.   The first £1bn plus scheme is probably only weeks away and this will open the floodgates to more large deals.  We could even see restrictions on available capital if some providers reach their limits during the year. 

Q2.  The first quarter also saw the continued popularity of pensioner buyouts with the Morgan Crucible and TI Group deals.  Why do you think pensioner buyouts have become so attractive?

A2.  Lucida was delighted to win the Morgan Crucible deal, which was the first of its kind, insuring the whole pensioner liability of the two Morgan schemes but also transferring the administration services to Lucida. The key risks to the trustees were removed instantly at a very good price.   Pensioners are the easiest group to buyout, principally because the funding of pensioners is usually closer to the buyout cost and therefore seen as more “affordable”, but also because pensioners are a distinct and often smaller population than the deferred membership and therefore a good first step. The data for pensioners is usually much more reliable too.  Buyout of pensioners removes longevity, interest and inflation risks from that group of members but does not involve full wind-up of the scheme.  It is therefore more appealing psychologically and keeps the trustees’ options open. 

Q3.  We have recently seen buyouts that achieve a complete clean break for the sponsoring company such as Emap and Rank deals.  Do you think these kinds of buyouts will become a mainstream feature of the market?

A3.  Companies are very interested in clean break solutions and rightly so.  The main objective of buyout is to eliminate risk and the sooner the better.  The clean break deals recently completed achieve that.  The deals have involved a lot of work behind the scenes to achieve the desired outcome, but they are essentially using techniques that have been long available to pension schemes.  For many companies this will be the obvious choice in future and this is reflected in the requests for quotations we receive.  Because of the need for companies and trustees to be completely safe, buyout companies with good pensions and legal knowledge will dominate in this market. 

Q4.  Bulk annuities are very capital intensive.  Are you concerned that the credit crunch and the possibility of a recession may restrict the capital you have access to for bulk annuities?  Could this push your prices up?

A4.  The strong security behind buyout with a regulated insurance company comes from the capital the insurer is required to hold above and beyond the liabilities taken on.  The current difficulty in raising capital may constrain some providers in the short to medium term.  Fortunately, Lucida has a single backer with no need to borrow to finance buyout capital – the credit crunch therefore plays to our strengths giving us no concerns about capital restrictions.  Lucida’s pricing has always been realistic, based on the information provided and the risks presented, but prices may well be driven up by the laws of supply and demand generally.  Prices are unnaturally low right now, while buyout companies fight for market share, but this will change over time.  The current buyer’s market is unlikely to be sustained in the medium to long term, so companies and trustees seriously considering buyout in some shape or form should take advantage of the positive conditions while they can.