Risk-transfer activity for U.K. sees major increase in quarter

Pension risk transfer transactions started picking up in the third quarter in the United Kingdom after a slow start to the year, as favorable exchange rates enticed non-U.K. plan sponsors to take action on U.K. pension liabilities.

Since U.K. voters elected on June 23 to leave the European Union, sterling's spiral downward against the euro and other currencies has continued, driving European sponsors with U.K. pension funds toward transferring risk.

On Oct. 17, sterling was trading at £1.21 vs. the dollar, down 9% from £1.33 on June 23.

In the third quarter ended Sept. 30, Dutch paints and coatings company AkzoNobel N.V. and Spanish electric utility company Iberdrola SA announced deals for their U.K.-based pension plans.

AkzoNobel's ICI Pension Fund, London, with £9.3 billion ($11.3 billion) in assets, completed two post-Brexit buy-ins: a £750 million deal immediately after the referendum and a £980 million deal in October.

And one of Iberdrola's U.K.-based plans, the £1.2 billion Manweb Group of the Electricity Supply Pension Scheme, Lanarkshire, Scotland, completed a £1 billion longevity swap in early August, insuring current retirees' liabilities with Abbey Life Assurance Co. but retaining both administrative and investment responsibilities for the plan.

Russell Lee, director of strategic transactions in pension risk transfer at Legal & General Group PLC in London, said that U.S. sponsoring companies also will be taking advantage of the weakened sterling.

“Although we haven't yet seen many deals, there are a number of transactions in the pipeline involving a U.S. sponsor,” said Mr. Lee.

“U.S. sponsors who are cash rich, and who have tax capacity in the U.K., may be willing to make additional funds available to lock in these gains by the purchase of insurance,” he added.

Jay Shah, head of origination at Pension Insurance Corp. in London, said the time is right to transact for non-U.K. parent companies with operations in the U.K. Even though the drop in sterling adds to liabilities, deficits in non-sterling terms have not deepened to the same extent.

David Ellis, London-based U.K. leader, bulk pensions insurance advisory, at Mercer LLC added: “The weak value of sterling makes it significantly cheaper for non-U.K. sponsoring employers to boost the funding of their U.K pension plans and coupled with U.K. equities at an all-time high, this means the cost of pension derisking is cheaper than many might otherwise realize.”

Michael Walker, principal consultant at Aon Hewitt, London, said that improved pricing was initially driven by wider credit spreads seen after Brexit.

Market movements following the Brexit vote led to an estimated £10 million saving in the cost of the transactions, Lane Clark & Peacock, the lead adviser on both ICI deals, said in a statement after announcing its first post-Brexit deal.

“While credit spreads have subsequently fallen, yield opportunities on other asset classes mean that bulk annuity pricing continues to be good,” Mr. Walker added.

Pushed by ballooning pension deficits, U.K. domestic pension sponsors also moved to complete bulk annuity transactions in the third quarter. At least six other U.K. plans, in addition to ICI and Manweb, are considering or have completed buy-ins through Sept. 30, including:

• U.K. motoring group AA PLC, whose £2 billion defined benefit pension scheme was running a £622 million deficit as of July 31, said in its interim financial report Sept. 28 that “in light of the anticipated increase in cost of the AA pension scheme, the group is undertaking a review of the options for mitigating current and future liabilities.”


• The £1.64 billion Pilkington Superannuation Scheme, Lancashire, England, completed a £230 million pension buy-in with Pension Insurance Corp. At the time of the deal, announced Aug. 22, Keith Greenfield, chairman of the trustee company, said in a statement: “We had to move quickly to secure the buy-in in the light of current volatile markets.”


• Amey OS Pension Scheme, Oxford, England, a £150 million plan, completed a £65 million ($85 million) buy-in deal with Just Retirement Ltd.

Some U.K.-based pension funds with U.K. sponsors may still be waiting to complete their bulk annuity deals, holding out for clarity around the political and economic implications of Brexit, sources said.

Andrew Waring, CEO of MNOPF Trustees Ltd., which sponsors the £2.97 billion Merchant Navy Officers Pension Fund, Surrey, England, said in an e-mail that: “We are not convinced that there is notable benefit in transacting in the second half of this year in comparison to the first half, but it would not be surprising if some schemes had delayed transacting, while waiting to get a better understanding of whether the Brexit vote would impact upon the market.”

Longevity swaps could be facing some pricing pressures, too.

Aon Hewitt warned on Oct. 27 that lower rates of improvements in mortality are causing a dislocation in longevity swap pricing in the U.K. As a result, pension schemes, it said, should consider delaying transactions until the market pricing corrects.

Even as deals in bulk annuity transactions accelerate, it could be difficult for 2016 to top the pace set in 2015.

Aon's Mr. Walker said that because of the Solvency II deadline in January 2016, a number of deals were rushed to completion before the end of 2015, bolstering last year's total value of transactions.

Data from consultant Barnett Waddingham LLP show the value of the bulk annuity market, including buyouts and buy-ins in the U.K., topped £12 billion in 2015.

Meanwhile, the deficit of FTSE 350 company defined benefit funds more than doubled over the year ended Aug. 31, increasing to £189 billion, said Mercer. Nevertheless, it is unlikely that 2016 will top 2015's risk transfer figures despite the need to reduce those deficits. In the first half of 2016, only £3 billion of deals came from pension funds. By comparison in the first half of 2015, pension funds completed deals covering £4.4 billion.