UK - Cable & Wireless (C&W) and Prudential have signed the first £1bn (US$1.8bn) bulk annuities pension deal.
Speaking to Global Pensions, Steven Haasz, managing director wholesale, Prudential, said the deal was the first of what could be a new trend in the market: "We have had a lot of queries from schemes in the billion-plus bracket. The sheer number of queries has increased as has the average size of schemes looking - just over a year ago buyout deals were around £400m. We have two or three queries in the pipeline in the region of £2-3bn."
The deal cuts the size of C&W's pension liabilities by half, improving both scheme security and the economic attractiveness of the company for shareholders, while it will be 'business as usual' for pension scheme members.
Tony Rice, group finance director, C&W, said: "The buy-in materially reduces the fund's and shareholders' exposure to the future risk of adverse changes in actuarial assumptions and investment returns.
"The involvement of a financial institution of Prudential's quality should provide our pensioners with confidence that their fund will continue to be well-managed."
C&W was advised throughout the process by actuarial consultants Lane Clark & Peacock (LCP).
Clive Wellsteed, partner at LCP said the size of the deal was a "big vote of confidence" for the bulk annuity de-risking model.
He added: "Earlier this year we predicted £10bn of deals would close in 2008 - the market is well on track for this. Looking ahead, the attractive deals are still out there - it's just the insurance companies have finite capacity to complete transactions."
Haasz said Prudential was not the cheapest provider in the process and that the company "didn't dive into the lowest region of the market" in terms of pricing. He added there were companies "dipping their toe in the water" with regards to entering into bulk annuity deals but some had concerns about the sustainability of the market.
"Cleary, low prices are attractive, but this is a long term arrangement and a 'cheap as chips' deal might not be the best benchmark for corporates and trustees."
These sentiments have been raised before, notably by PricewaterhouseCoopers, which questioned whether the aggressive pricing in the market was sustainable in the long term (www.globalpensions.com; 23 June 2008).
Haasz added there had been previous deals where Prudential had been unable to compete on price: "We have a disciplined approach, we want sustainable business. I do think there have been some deals done at unsustainable prices. Post-Bear Sterns and Northern Rock, pension fund trustees and advisors are looking at more than just price.
"A pension fund trustee wants to know the provider is going to be there for their members in 30 or 40 years time and have member interests at heart."
Steven Dicker, a senior consultant at Watson Wyatt, which advised the trustees, commented: "Small, well-funded schemes were the low-hanging fruit for insurance companies and it was inevitable that smaller deals would be completed first.
"It's not so easy for an insurance company to digest £1bn of liabilities in one go, while pension funds know there is no turning back once a complex bulk annuity contract has been signed and that getting it wrong can be very costly in the long run. Looking ahead, we expect more transactions on this scale."
The largest bulk annuity deal to date was signed between mono-line insurer Paternoster and shipping company P&O (www.globalpensions.com; 14 December 2007), worth £800m.
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