Up to half of the pension schemes of firms listed on the UK FTSE 350 index could be transferred to insurers by companies looking to shed the risk of running retirement plans, a Watson Wyatt consultant said on Thursday, according to Reuters. With new firms joining the lucrative pension buyout market and forcing down prices, more companies are likely to offload pension schemes, Steven Dicker told a conference hosted by the Cass Business School. "Half of the FTSE 350 (companies) are potentially going to make that move," he said. By removing the risk that a pension fund poses to a firm's balance sheet, a company that made the move could see its shares rise to compensate for the cost of the decision, he said. Pension liabilities, swollen by falling bond yields, have become a headache for UK firms as new accounting standards mean liabilities are treated like debt on their balance sheet. As a result the UK market for bulk annuities -- where insurers take on lumps of pension liabilities in exchange for upfront payments -- has begun to take off. Some estimates say it could be worth up to a trillion pounds ($1.9 trillion), as firms wind up generous, but increasingly costly, final salary schemes. However, Britain's Pensions Regulator has expressed concerns over the risk of handing over management of pension plans. At present the cost of handing pension liabilities to an insurer -- known as the buyout cost -- is high, although new entrants may cut prices somewhat, Watson Wyatt's Dicker said. The buyout cost is up to around 40 percent more than the price of fully matching pension assets to liabilities under current accounting standards, but competition could cut that added cost to 20 percent or even lower, Dicker said. At least a quarter of FTSE 350 firms, with buyout-based liabilities of less than 1 billion pounds each, could make the insurance move, he said. The pension funds of these firms typically had a shortfall, measured on a buyout basis, of less than 10 percent of their market capitalisation. If the buyout cost can be cut significantly, then up to half of those 350 firms might embrace the buyout idea, he said. Companies must take a long-term decision about what they want to do with their pension schemes rather than tinker with small changes, Dicker said. "The time has come to stop death by a thousand cuts ... what employers are looking for is something long-term." Currently dominated by insurers Legal & General and Prudential, the pension buyout sector has in recent months attracted giants Aviva and AIG, as well as start-ups like Paternoster and Synesis Life -- run by former Prudential executives -- and investment bank Goldman Sachs. In late October insurance giant Aegon became the latest arrival in the pension buyout market. In this market third parties make money by using asset management and insurance expertise and by exploiting economies of scale to manage assets more efficiently than employers could. Hundreds of UK firms have closed final-salary pension plans to new staff and in some cases have also stopped accruals of benefits for existing members as well. In many cases, employees are moved to pension plans in which benefits depend on investment returns rather than a pay-based formula.
