Buyouts cooling but not frozen – Paternoster

Pensioner buy-outs that are supported by a derisked investment strategy remain up to 15 per cent more affordable than at the beginning of 2007 and are little changed since March, according to Paternoster.

The buyout specialist firm’s buy-out index shows that the combination of falling asset values and the impact of anticipated defaults on bond yields has reduced the affordability of buy-outs.

It says this will have a particularly strong effect on schemes that have substantial equity holdings and are looking to buy-out deferred as well as pensioner liabilities.

The quarterly Paternoster buy-out index tracks pricing trends in the defined benefit pension scheme buy-out market by looking at the pensioner and deferred member liabilities of a representative defined benefit pension scheme.

Mark Wood, chief executive of Paternoster, says: “In theory the increase in corporate bond spreads reduces buy-out cost. An increase in anticipated defaults has the reverse effect. In the medium term, we’re sure that this increased uncertainty will mean that trustees will be even more attracted to the security that buy-out brings. However, the volatility of today’s credit markets has quite naturally led many trustee boards to defer the decision to buy-out until market outlook, particularly for defaults, becomes more predictable.”