By Simon Jessop, Arathy S Nair and Noor Zainab Hussain
LONDON (Reuters) - UK companies are expected to try and offload a record amount of risk linked to their pension schemes in 2019 as growth in life expectancy eases and interest rates rise, making deals more attractive for insurance firms.
A company's pension obligations sit on its balance sheet and can limit its financial and strategic options so most boards are keen to pass the burden on.
Since the financial crisis, many have seen the gap between the scheme's assets and what they will have to pay out to employees widen, as returns from the safe government debt in which many assets were invested fell and people lived longer.
Although life expectancy is still growing, recent data from the Institute and Faculty of Actuaries shows the pace of that growth has eased and two UK interest rate rises have improved the returns from government debt, closing the valuation gap. Companies now have to stump up less money to transfer their pension obligations.
Deals to shed part or all of the liability to specialist insurers are expected to total a record 21.5 billion pounds by year-end, smashing a previous record of 14 billion pounds, but 2019 could be even better.
Chris DeMarco, head of UK pension risk transfer at L&G, Britain's biggest provider, said the pipeline for 2019 was "robust, to say the least", with estimates of between 15 billion pounds and 20 billion pounds for the first half the year alone.
The enduring interest in selling off pension fund obligations among UK plc is likely to boost profits for some of Britain's biggest insurers including Legal & General <LGEN.L> and Aviva <AV.L>, as well as smaller specialists including Just Group <JUSTJ.L>.
The desire to pass on the risk in the schemes - most of which are closed to new money - has become even more acute as economic prospects darken before Britain quits the European Union in March.
"It's been an incredibly busy and high-volume year and, looking forward... we think 2019 will be even busier," James Mullins, Partner and Head of risk transfer buy-out solutions at Hymans Robertson, said.
In part, that will be driven by the many companies that wanted to do a deal this year but which were told to come back in the new year. "That queue means that next year is going to get off to an incredibly busy start," Mullins added.
For the first time this year there were more schemes looking to secure a deal than insurers were able or willing to take on, forcing schemes to do more to prepare by ensuring better quality data on members, which enables insurers to price the deals more accurately, Hymans said.
Strong demand is expected to lure fresh entrants to the market in 2019, with private equity and U.S. insurers among those rumoured. Others may set up special purpose vehicles to house the risk.
For most interested buyers, the biggest impediment to deal-making is finding assets capable of generating income to match the risk they take on. The more income they get from those assets, the more attractive the price they can offer the pension schemes.
"People are having to source assets more widely," Sammy Cooper Smith, co-head of the business development team at Rothesay Life.
While previously insurers may have earned enough from corporate debt, they are now looking at more illiquid but higher-yielding assets such as infrastructure, with some looking overseas.
Industry experts expect the first quarter to be particularly busy as schemes which fail to secure a deal early on in the year face the uncertainty of Britain's exit from the European Union at the end of March and how that could impact pricing.
"I do expect an impact from Brexit, I just don't know what that impact is going to be yet," said Rothesay's Cooper-Smith.
(Editing by Sinead Cruise and Elaine Hardcastle)