Pension Corp. in £30m buyout of Nova Chemicals UK Pension Plan

Pension Corporation continues to be one of the most active participants in the pension risk transfer and de-risking marketplace as they complete regular transactions with counterparties. Their latest transaction see’s them enter into a pension buyout agreement with Nova Chemicals UK Pension Plan (press release available here).

The buyout agreement covers £30m of Nova Chemicals pension liabilities and covers 155 members of their pension plan.

Mitul Magudia from Pension Insurance Corporation, said; “The pension buyout enhances what is already proving a successful year to date for Pension Insurance Corporation, having already written approximately £500m of new business. The pension buyout market is particularly busy in 2011, whereas in the previous three years pensioner buy-ins were more prominent in the risk transfer market. PIC is involved in auction processes for buyouts and buy-ins for small and medium pension funds totalling approximately £1.5bn; and large pension funds where we are participating in processes totalling approximately £8bn.”

Meanwhile, Mercer, who advised on this transaction, have also published an article stating that despite volatility in the financial markets pension buyout prices remain broadly stable. They say this is good news for schemes as long as they have moved out of equities, as most schemes tend to during a buyout process.

“Schemes should consider as a matter of course how to manage the investment of assets leading up to the purchase of a bulk annuity,” stated Akash Rooprai, principal in Mercer’s de-risking group. “To minimise the impact that volatility has on the difference between assets held and insurance costs, a strategy consisting of a portfolio of corporate bonds, gilts and possibly with some relevant derivatives as the purchase approaches, would be prudent. This minimises the potential for market movements making the planned transaction unaffordable, although of course this also removes the potential for gains. That said, once a scheme has decided to purchase a bulk annuity, it is not investing for asset gains, but to achieve the objective of purchasing the bulk annuity at an affordable cost.”

Pension scheme buyouts are proving a popular choice with smaller scheme owners seeking to remove any longevity risks and liabilities from their balance sheets. By completely offloading the liabilities associated with a pension scheme they can remove all longevity risk efficiently.