It has been 10 years since the first pensioner buy-in was completed. Helen Morrissey looks at how the industry has evolved.
On 26 January 2007 Hunting plc put in place the first pensioner buy-in. The initial £110m transaction was advised on by LCP and carried out by Paternoster, and allowed the energy services firm to cover all pensions in payment.
Annuity purchases, where a scheme purchases an annuity covering one or more members, have happened for many years. What differentiated the Hunting transaction were specific contractual features that meant it could be considered an investment for the benefit of all members rather than just the members covered.
The key feature is that in the event of the scheme winding-up underfunded (e.g. if the sponsor became insolvent) the insured benefits could be restructured in such a way that all members receive the correct benefits.
This means the buy-in can be considered as purely an investment with no need to seek additional funding from the sponsor. This approach has been widely adopted in transactions since and has contributed to the growth of the market.
In the 10 years that have followed, the de-risking market has mushroomed. The most recent LCP de-risking report says over one million people have now been insured through bulk annuities.
This has been achieved by UK company pension schemes transferring £70bn of assets to insurers in the past 10 years. This equates to around 5% of the circa £1.5trn of total defined benefit pension assets and is split between 55% buy-ins and 45% buyouts.
The size of deals has also grown massively over the past decade. While the Hunting plc transaction was worth £110m, Cable & Wireless completed a massive £1bn buy-in in September 2008. This has since been dwarfed by a £3bn buy-in carried out by ICI in March 2014.Over the years ICI has insured approximately £8bn of its liabilities through a series of transactions
To see a list of the major buy-in transactions completed over the last ten years click HERE.
The industry has enjoyed a rapid shift into the mainstream according to Pension Insurance Corporation's (PIC) head of strategic development David Collinson. "If we turn back the clock, insurance was only really used by small pension schemes that had gone bust - it certainly wasn't part of mainstream scheme risk management," he says.
"However, we had the Pension Protection Fund (PPF) being set up at the time and a lot of these small plans were going into the PPF so that market was disappearing. As companies got to grips with their new responsibilities under the new regime the option of using insurance became much more attractive. This got to the point where relatively quickly we were seeing large well-resourced schemes considering it as an option. This culminated in deals such as those transacted by ICI and Total."
LCP partner Charlie Finch was involved in the Hunting plc transaction and says the introduction of new insurers quickly helped the market to become extremely competitive: "It was an exciting time to be involved in the market as we had new insurers such as Paternoster and PIC coming in and forcing some stiff competition," he says. "When we worked on another large transaction soon after we saw the price come down dramatically as this competition kicked in."
However, such competition brought its own issues as several providers who were active such as Lucida, Paternoster and MetLife have since exited the market. This experience has not put people off though, with Scottish Widows and Canada Life both recent entrants to the market.
Finch admits it can be difficult to assess new entrants against more established players: "The market has always been very competitive with lots of people entering and leaving. It does leave questions around how you assess new providers. Should you look at them differently to current participants? It is a big debate. However, it is also worth pointing out that even those providers who exited the market did so in a way that ensured member benefits were secured."
Appetite for bulk annuity transactions remains unabated. Finch expects that when insurers confirm final data for 2016 we should see approximately £8.5bn worth of transactions for that year.
So how will we see the market develop? Allen & Overy senior associate Andrew Cork believes we could see less of the mega deals that have characterised the buy-in market so far.
"For big schemes, it often makes sense to divide their liabilities into tranches and insure these gradually as the pricing is right," he says. "That might mean a move away from the mega deals that previously drove the best pricing. It also means both insurers and trustees can be a bit more nimble about how they transact."
He believes there will be further changes to how larger schemes approach the market, which will affect the time it takes to transact: "Our recent experience might also change how big schemes approach the market: We've seen large schemes put in place umbrella contracts with a panel of insurers so that they can transact extremely quickly when the pricing is right," he says. "It means the old days of a transaction taking six months or more to execute are over."
He added that smaller schemes need to ensure they are nimble and prepared to transact quickly if they are not to be pushed to the back of the queue.
So while the buy-in market has enjoyed enormous success over the last decade, it is clear there is much more room for expansion. Further process efficiencies and emphasis on being prepared will ensure schemes get the best deals.
To see a list of the major buy-in deals transacted over the last decade click HERE
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