The buyout market is virtually non-existent in the US, but market volatility and tough funding regulations means that is all set to change, as Chris Panteli reports
"I think you will see US firms voluntarily moving closer to the international accounting standard, creating more of a marked to market dynamic within pension funds which ends up dealing with the real risk," said Waldeck.
All these changes are likely to fan the flames of demand for buyouts in the US, he added.
Established buyouts
The buyout market is well-established in the UK, with the launch of Paternoster in 2006 marking the introduction of a plethora of specialist companies who took it out of the hands of big insurers such as Prudential (UK) and Legal & General.
The US market has never really taken off, but with heavy losses, market volatility and regulation all piling on the pressure, the situation is set to change.
US consultants are certainly bracing themselves for growth in the area, with international firms such as Mercer moving staff who have gained experience in the UK and Europe over to the US in preparation.
Mercer has imported experienced hands such as risk consultant Gordon Fletcher, senior consultant John Exley and Nick Maloney, whose recent promotion from European to global head of the firm's Financial Strategies Group was seen by many as a declaration of intent.
"Yes, we are importing non-US talent to the US for that purpose, absolutely," said Mercer's financial strategies group director, Robert Burke. "Our whole premise in creating a financial strategies group was to link the experience of the continent - the Netherlands and the UK particularly - and the US.
"The wave could be coming - or it's coming in different shapes. For example, the UK system and even the Dutch system are simpler in their regulatory framework, although they often include inflation issues, which the US issues tend not to. So it's about saying ‘this is what's happened, these are the tools you can use, these are the ways we work with the insurers'. That's clearly on the screen and the takers of that paper - the big insurers - know it's coming so they're gearing up for it too. It's clearly on their screen too."
When this wave hits depends on how long it takes for interest rates and the S&P 500 to improve, said Prudential's Waldeck. Despite the caution, he believes the first movers will enter the market within the next 12 months.
He said: "We are actively engaged with sponsors evaluating this. Funding status and interest rates are a headwind, but there have been jumbo sponsors who have put very serious analysis on forward planning; they just haven't pulled the trigger."
One issue which will have a major effect on how the fledgling market develops is the make-up of the counterparties. Under US law, organisations can only transfer liabilities through a highly-rated insurance company. This could prevent specialist companies springing up to cater for demand as they did in the UK.
However, the large insurers who do fit the bill - and Prudential may be one of them - are interested in taking on the risk, according to Mercer's Burke.
"We've done significant work in going to the major players in the market over here, having dialogue with them and there is very much interest on their side. The key is, counterparties matter. In a sense all of these things about risk transfer depend on the recipient of the transferred risk remaining a credit-worthy entity."
One of the lessons many UK schemes learned the hard way was making sure their membership details were clean in advance of making a deal. Having waited for ideal market conditions before pulling the trigger, schemes were left with a delay of up to nine months due to out of date details. Burke said ensuring schemes are prepared is key.
"If that's where you're tending to go and you're not funded up, use the time now while you're accumulating better funding to do the data cleansing and to get things ready if you know that's an option you want to have."
The eventual design of the buyout market in the US is still uncertain, but it seems clear it is only a matter of time before it begins to grow. Poor market performance and new regulation make it too tempting an offer for many employers, and when the time is right, they are likely to grab the opportunity with both hands.
"It's more likely it will be a gradual process, depending again on interest rates and the funded status of schemes," said Waldeck. "It has enormous promise for large, well-capitalised global insurers, especially those with asset management/asset liability matching expertise."
