Largest UK pension buy-in sees longevity risk reinsured immediately

The largest UK pension buy-in and bulk annuity purchase has been announced today, involving AkzoNobel’s ICI Pension Fund entering into annuity buy-in agreements with Legal & General and Prudential to cover £3.6 billion of liabilities.

Unlike in other large bulk-annuity transactions, where insurers have tended to hold the risk assumed from the pension fund for some time, the insurers involved have sought to reinsure the majority of the longevity risk immediately in this case.

The deal announced today is also unusual as it uses two insurers, most buy-ins do not. The two buy-in annuity agreements are with Legal & General plc and Prudential Retirement Income Limited and provide the ICI Pension Fund with cover in aggregate for £3.6 billion of its pensioner liabilities. AkzoNobel said this is broadly equivalent to one-quarter of its pension liabilities and one-third of the ICI Pension Fund liabilities.

Keith Nichols, Chief Financial Officer of AkzoNobel commented on the deal “By purchasing these bulk annuities, the Trustee has taken a significant step in actively de-risking liabilities and reducing the risk that AkzoNobel will be required to contribute additional cash in the future.”

The buy-ins involve the purchase of bulk annuity policies under which the participating insurers will pay amounts equivalent to the benefits payable to a subset of current pensioners of the ICI Pension Fund. The pension liabilities remain with the fund but the longevity risk is transferred to the insurers providing the annuity, except in this case both insurers have reportedly chosen to reinsure the bulk of the longevity risk straight away.

Legal & General is responsible for £3 billion of the transaction, making it the single largest UK pension insurance transaction ever seen in the market. Prudential has taken the other £600m in the second part of the transaction.

Tom Ground, Head of Bulk Annuities and Longevity Insurance at Legal General commented “We are extremely pleased to have implemented this landmark buy-in arrangement with the ICI Pension Fund, one of the larger pension funds in the UK. Legal & General have worked closely with the Trustee to develop a bespoke arrangement, which leverages both our 27 years’ experience from being a market leader in the bulk annuity market with our ability to transition assets using our industry-leading investment management capability. This transaction further demonstrates Legal & General’s ability to provide innovative bulk annuity solutions to large pension schemes.”

Clive Wellsteed, Partner at LCP and lead adviser to the Trustee for this transaction, added; “At £3bn, this landmark transaction is the largest of its kind to date, with the Fund using its scale to negotiate competitive terms, reduce risk and enhance member security. It demonstrates the appetite of mature final salary schemes to de-risk their pensioner liabilities and shows how transactions can be successfully structured at a scale not previously seen.”

Towers Watson who advised AkzoNobel on the transaction said that the transaction involved two stages, which differs from most bulk annuity transactions seen to date.

The first stage involved the selection of insurers by the fund, with two being used to achieve the scale of risk transfer required. The transaction was then split across the insurers as the fund decided was appropriate.

The second stage explained Ian Aley from Towers Watson, was more akin to a longevity swap; “The insurers have sought to reinsure the majority of the longevity risk immediately. This two-stage process is routinely used in the longevity swap market, however to date the insurers in the bulk annuity market have generally held the risk for a period of time before reinsuring.”

So far there has been no announcement from any of the large global reinsurance companies who would typically be expected to be involved in reinsuring the longevity risk from this transaction. If we find out more in the coming days we will follow-up on this.

The bulk annuity market is one way that longevity risk will continue to flow into the reinsurance market, despite recent changes announced in the UK budget potentially having a negative effect on this, as we wrote yesterday here. The pension risk transfer market at least seems alive and well although this particular transaction has been in the works for six months reportedly, so it remains to be seen how the market reacts to lower levels of personal annuities being purchased.