LONDON — Citigroup Global Markets Ltd. next month will become the first investment bank to take on the liabilities of a U.K. pension plan when it takes over operation of the £218 million ($439 million) Thomson Regional Newspapers Pension Fund.
Citigroup will continue to fund the benefits of plan participants until all long-term liabilities have been met, said Francis Fernandes, London-based head of pensions actuarial at Citigroup. The fund had £194 million in liabilities as of Dec. 31.
Although insurers also have taken on pension liabilities of a U.K. pension plan, Citigroup is the first investment bank to make the move. Taking on the London-based TRN pension plan will enable the bank to access to any surplus in the mature and well-funded plan once all the liabilities have been met.
“Normally in mergers and acquisitions, the interest is in buying the company and not the pension plan,” Mr. Fernandes said. “In this case, the reverse is true.”
In the U.S., Citigroup has a number of similar deals in the pipeline, according to Ari Jacobs, Citigroup’s New York-based managing director and head of the bank’s newly established retirement benefits advisory group.
“There has been a tremendous shift in the pensions market where more organizations have frozen plans with risky assets that are hard to capitalize. … When a pension plan has no benefits flowing through it, it sits there as assets and liabilities that are uncompensated risks” for the employer, said Mr. Jacobs.
A liability buyout by an investment bank is attractive for companies with pension plans because it costs less than going through an insurer, but exact terms would depend on the age of the members in the plan, he said. He would not give details on Citigroup’s terms.
Exact details of the TRN-Citi pension deal were not available. Neither Mr. Fernandes nor TRN spokeswoman Sally Ling would disclose how much Citi paid to acquire the pension plan. A source close to the deal said “it was not a case of buying or selling.”
Following discussions with scheme trustees, Citigroup agreed to support the plan by putting up contingent assets to cover the impact of any adverse future uncertainties such as unexpected improvements to life expectancy, said Mr. Fernandes. No further details were available.
Meet final liabilities
Analysis of TRN company accounts by Richard Jones, principal at consultant Punter Southall Group Ltd., London, shows that Citigroup should be able to meet the final liabilities in about 15 years and acquire the surplus. At the end of 2006, the plan had an accounting surplus of £24 million. It has been closed for 10 years and as of Dec. 31, 2,800 members were retired and 800 others have not yet begun collecting benefits, according to Mr. Jones.
Mr. Jones speculated that Citigroup will have paid TRN a “trivial” amount of less than £5 million for the current value of the surplus. Citigroup likely had the upper hand in bargaining with TRN because “the only alternative way to dispose of the pension scheme was through a buy out with an insurance company, at considerably higher expense,” said Mr. Jones.
Mr. Fernandes described the Punter Southall report as “interesting speculation.”
Around half of TRN’s plan assets are currently held in annuity policies, said Mr. Jones. The rest of the plan is managed by Legal & General Investment Management Ltd., mostly in U.K. government bonds with around 13% invested in equities.
Neither TRN nor Citigroup would say if Legal & General would be retained, but Mr. Fernandes said a low-risk liability-driven investing approach would be used by the trustees to manage the assets. He said the fund’s five trustees — three incumbent employee representatives plus one appointed by Citigroup and an independent board chair — would decide on any asset management changes.
Citigroup may be keen to use its in-house resources to get a slice of the plan’s investment fees, said Mr. Jones. But Citigroup also faces the possibility that trustees will decide to “de-risk” the investment strategy and move all equity investments into gilts or buy more annuity policies.
“The appeal of the deal to Citigroup relies on their ability to maintain the surplus within the pension scheme and eventually tap into it,” said Mr. Jones.
He thinks Citigroup is likely to be able to hang on to the surplus, which is based on valuing the liabilities using a 5% discount rate. Citigroup should be able to achieve an investment return higher than that over the long term and increase the surplus in the plan, said Mr. Jones.
Mr. Fernandes said Citigroup had been “very cautious about allowances for future improvements in life expectancy over the coming years” and neither he nor Mr. Jacobs would comment on the return on investment they hoped to achieve through managing frozen pension plans.
