Green light for Pension Insurance Corporation

Bulk annuity vehicle, the Pension Insurance Corporation (PIC), has received its licence to operate from the UK's Financial Services Authority (FSA), as competition in the sector heats up with Goldman Sachs becoming the latest organisation to declare an interest in the market.

Speaking at the launch of PIC, company chief executive Edmund Truell, who founded private equity firm Duke Street Capital, said that the increasing awareness of the risks posed to companies from their pension liabilities meant that now was an ideal time to enter the bulk annuity market.

"Longevity is a significant risk - you only have to look at British Airways to see how it has come home to roost on corporate balance sheets," said Truell. "One obvious way to do this is by securitisation - this tool is not yet available but the best way to manage pension liabilities is to shift the risk onto the capital markets in one form or another."

PIC has raised over £1 billion of capital to fund its buyout activities and is believed to have secured the backing of Swiss Re - a move which fits with the Zurich-based insurer's statement in the previous issue of Life and Pensions that it is looking to enter the UK's longevity market (Life & Pensions, September, p10), and also US financier Christopher Flowers.

As yet, none of the three start-up bulk purchase annuity providers - the other two, Paternoster and Synesis, are headed by former Prudential UK employees Mark Wood and Isobel Hudson respectively - but this lack of activity has not deterred Goldman Sachs from also entering the UK pension market.

Last month, Goldman Sachs announced that it was establishing its own buy-out vehicle led by Addy Loudiadis - former co-head of its European investment banking division - and has applied to the FSA for a license to operate. It is understood that the investment bank is looking to take-on the liabilities of closed pension funds.

Loudiadis has a derivatives sales background and direct experience of large bespoke fixed income transactions with complex accounting features. The bank has advised on a number of takeovers that have been derailed by pension issues, and the buy-out vehicle is likely to be deployed to support the mergers & acquisitions franchise.

This appearance of further competition was welcomed by Mark Wood, CEO and founder of start-up buy-out firm Paternoster, which hopes to finalise its first handful of transactions by late November or early December. He said this will provide a much-needed injection of capital into a market where the desire to off-load pension liabilities is fast out-pacing companies that are ready to take them.

"There is a huge shortfall in capital at the moment," explains Woods. "Whilst the amount of capital available in the market is sufficient to deal with current levels of demand, this is likely to rapidly change in the coming years. Solvency II is likely to be the final nail in the coffin of DB schemes; and by 2012, companies will have to put so much capital behind their pension schemes that almost all of them will be wanting to get rid of them."