CA Summit 2008: Runaway capital costs hitting buyout market and company DB schemes

The high cost of capital is putting a squeeze on the buyout market and restricting the options open to companies with defined benefit schemes, pension specialists warn.

In a panel debate at the Corporate Adviser Summit in Hampshire last month, practitioners said that the sharp falls across global stock markets have put increasing pressures on both DB funding and insurers’ capital adequacy ratios, which was slowing the momentum building in the sector.

Only £6.8bn worth of deals have been completed this year with experts reporting a distinct slowing in the number coming to market.

Steve Folkard, head of pensions and savings policy at Axa said that the poor performance of a wide range of asset classes has led to buyout companies reassessing whether they can eke out the extra performance from these funds to justify taking them on.

“A lot of the liabilities in these schemes are underpinned by corporate bonds and gilts and a lot of people are now re-evaluating these assets and it is not clear how it will pan out,” he said.

Robin Ellison, head of strategic development at Pinsent Masons, said that the problems faced by the monoline insurers were exacerbating concerns and further sucking capacity out of the market.

The panel expect the market to be flat over the next year with deals only being carried out on a very selective basis, restricting the buyout option to the top tier of DB schemes on an affordability basis.

Andy Marchant, managing director of corporate pensions at Aegon Scottish Equitable, said he expects to see a rise in the number of phased or partial buyouts as a result.

“We think that rather than companies being able to afford a fully bought out scheme, they will instead look to manage their cost-base and gradually de-risk over time,” he noted.