Pension Insurance Corp. insures £1.6B pensioner liabilities for Total UK

Specialist insurer of defined benefit pension funds Pension Insurance Corporation (PIC) has completed another large pension risk transfer, taking on £1.6 billion of pensioner liabilities including longevity risks, from oil company Total’s UK pension plan.

This transaction saw Pension Insurance Corporation undertake a pension insurance buy-in with the Trustee of the Total UK Pension Plan, covering £1.6 billion of pensioner liabilities out of the plans total £2.6 billion. The longevity risk associated with the £1.6 billion of pensioner liabilities were assumed by PIC, however the insurer immediately transferred the longevity risks to a leading global reinsurance company in a transaction completed in tandem with the buy-in.

Iain McCombie, Chairman of Trustees for the Total UK pension fund, said; “This was a complex transaction in which we sought to bring certainty to a large portion of our liabilities. Working closely with our advisers at LCP and Mayer Brown and the team at PIC, we are delighted to have been able to conclude this transaction on favourable terms and within a tight timetable. PIC has been both flexible and proactive in helping us achieve our goals.”

A pension buy-in is designed to give the plan sponsor some certainty over future liabilities by passing them on to a specialist insurer such as PIC. PIC spends significant efforts analysing the pension portfolio and liabilities, in an effort to understand and minimise risks such as longevity, before assuming the portfolio.

The buy-in is typically the start of a longevity risk transfer pipeline, with the longevity risk assumed by the insurer first who then typically reinsures it (as happened in this case) immediately with a global reinsurer. Reinsurers are increasingly showing an appetite for longevity risks, with experts forecasting that the market is in longevity risk transfer and reinsurance is set to boom in 2014.

The availability of longevity reinsurance capacity is currently driving the price and availability of longevity risk transfer, according to market participants. As reinsurers increasingly assume longevity risk it is inevitable that at a point in time the reinsurers will also require a way to transfer longevity risk off their balance sheets to maintain their diversification. This is when a capital market solution is likely to become a priority and efforts to establish the longevity capital market will receive an increased focus.

Emma Watkins, Partner at LCP, advisor to the trustee and Total UK, said; “This is the second largest buy-in completed in the UK to date. The size of the transaction has required the implementation of an innovative structure that has been successfully achieved with the cooperation of PIC. We expect to see an increasing trend of £1bn plus transactions of this nature.”

David Collinson, co-head of business origination at Pension Insurance Corporation, commented; “We are delighted to have been able to help the Trustees achieve their aims of removing risk from the Plan. This is a landmark transaction for PIC and is significant for the bulk annuity sector, pushing pension liabilities insured already this year past £5 billion.”

Clive Wellsteed, Partner at LCP, and Head of the Buy-out Practice commented on the deal; “This deal forms part of a growing trend of FTSE100 and blue-chip companies looking to de-risk their staff pension schemes, since the recently announced ICI Pension Fund buy-in (£3.6bn) demonstrated bulk annuity contracts can be successfully structured at a scale not previously seen.”

Wellsteed expects more similar transactions and echoes other experts calls for continued growth in pension risk transfer; “We expect to see an increasing trend of £1bn-plus transactions of this nature, with 2014 having the potential to see over £10 billion in bulk annuity business which would be the largest yearly total yet. We are delighted that LCP has developed a reputation as the market leader in this specialised field.”

At this stage we don’t know which global reinsurance firm assumed the longevity risk associated with the transaction, however it is likely to be one of the usual suspects and if an announcement emerges in the coming days identifying the reinsurer we will update you. Update: Hannover Re reinsures longevity risk from PIC/Total pension buy-in.

We’ve added this longevity risk transaction to our list of major longevity swaps, risk transfers and reinsurance transactions.