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Aviation Authority pension fund secures £1.6bn buy-in

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The UK’s Civil Aviation Authority Pension Scheme has secured a £1.6bn (€2.3bn) insurance buy-in with Rothesay Life as the company moves to dominate the 2015 market with more than £2bn worth of business.

The pensioner buy-in, which saw Rothesay insure a section of the £7.3bn scheme’s liabilities, is the largest deal this year after Prudential’s £680m buy-in last month.

It means written business moves above £4bn this year, with buy-in pricing becoming particularly beneficial for UK defined benefit (DB) pension schemes through a combination of market movements and a competitive environment.

The latest buy-in is one of the largest of its type after deals between the ICI Pension Fund and Legal & General for £3bn and Total’s pension scheme and Pension Insurance Corporation (PIC) for £1.6bn in 2014.

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After a record £13bn of liabilities were insured in 2014, 2015 started off slowly but picked up traction in the second quarter, with three deals worth more than £500m each.

Commenting on the market, Shelly Beard, senior consultant at Towers Watson, said volatility in financial markets has made pensioner buy-ins more attractive, and led to an increase in the latest part of the year.

Buy-ins are priced against the cost of maintaining pension payments using a UK Gilt-based discount rate, with the cost of an annuity moving closer to that of Gilts.

This means schemes can trade holdings for bulk annuity contracts for little to no cost.

 Aon Hewitt BAMM

Source: Aon Hewitt

Bulk annuity pricing vs value of UK Gilts

“Some insurers [are also] seeking to aggressively build market share, and this has led to pensioner buy-ins achieving pricing that is significantly better than Gilts,” Beard said.

The pension scheme for the UK’s aviation regulator and air traffic control department was also able to monitor market movements affecting the scheme’s assets while the legal paperwork was being completed.

Changes in the insurance premium with Rothesay Life were pre-negotiated by the scheme’s adviser, Aon Hewitt.

For Rothesay, this represents a statement of intent for the 2015 market, as it now accounts for two of three largest deals announced.

The insurer also arranged a £675m buyout of the UK Lehman Brothers pension scheme.

James Mullins, partner and head of buyout solutions at UK consultancy Hymans Robertson, said the company was on an impressive run – taking its market share to more than 50%, if including a £1.2bn re-insurance deal arranged with Zurich for its legacy annuity business.

The overall UK market saw £804m of business written in Q1, dominated by Legal & General, but Prudential and Rothesay Life have since overtaken L&G with deals in Q2.

Should buy-in pricing remain favourable, larger deals are expected throughout the year.

Rothesay Life told IPE it estimated the market would reach £10bn by the end of the year.

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