The British Steel Pension Scheme (BSPS) has completed a buy-in deal with Legal & General insuring approximately 30% of its liabilities, which is worth £2bn (€2.3bn). The transaction brings the total liabilities insured to around 60%, it was announced.
The buy-in insurance policies purchased using existing assets of the scheme, are held as long-term investments of the scheme and have the advantage of perfectly matching a proportion of the liabilities, thereby de-risking the scheme from potential future mismatch between asset and liability values with changes in market variables, said Tata Steel, the scheme’s sponsor.
As of 30 September 2022, the BSPS represented a net surplus in the Tata Steel balance sheet of around £1.5bn. During the period of unprecedented interest rate volatility in the UK in September-October 2022, the BSPS funding level actually improved, and it had sufficient collateral to maintain its interest rate and inflation hedges, it said.
Overall, the scheme continues to have a healthy surplus and its risk position has improved since its restructuring in 2018, and quarter-on-quarter, it added.
The BSPS trustee previously entered into buy-in policies with Legal & General in November 2021 and May 2022 to insure 5% and 25% of liabilities, respectively, totalling about £2.8bn.
Tata Steel UK is fully supportive of the trustee having secured insurance cover of the scheme’s liabilities and expects that a residual buy-in for the remaining 40% of liabilities will be completed in the first half of calendar 2023, depending on market conditions.
With full insurance buy-in completed, the scheme, and in turn Tata Steel UK, will be fully covered against any funding shortfalls arising from changes in underlying conditions or market variables in future.
With each buy-in, a portion of the accounting surplus has been “utilised” to secure insurance for the scheme. In addition, changes in interest rates – along with changes in credit spreads and other actuarial assumptions – also result in changes in the discounted present value of assets and liabilities.
Accordingly, in line with previous quarters, there will be a non-cash deferred tax charge in the profit and loss related to the reduction in the pensions surplus, which is recorded under other comprehensive income.
“We expect the same accounting treatment for the residual buy-in transaction for the scheme liabilities,” the scheme said.
The BSPS is an independent fund with a team managed by its own board of trustees, separate from Tata Steel UK. Earlier in 2022, the trustee appointed Legal & General Investment Management (LGIM) to manage the combined assets of the scheme, bringing additional skills and expertise as the scheme approaches full buy-in.
Amey pension fund in £400m buy-in deal with PIC
The Amey OS Pension Scheme has concluded a partial buy-in transaction with Pension Insurance Corporation (PIC), a specialist insurer of defined benefit pension funds.
PIC worked directly with Amey and the trustee, insuring approximately £400m of liabilities, covering the pensions of 3,473 members, including 1,938 deferred members, it stated.
XPS Pensions Group acted as lead transaction adviser to a joint working group with representatives from Amey, a UK-based infrastructure services and engineering company, and the trustee.
Squire Patton Boggs provided legal advice to the trustee, while Broadstone is the scheme actuary. CMS Cameron McKenna Nabarro Olswang LLP provided Amey with legal advice.
PIC was advised by Addleshaw Goddard LLP.
Andrew Devlin, group pensions director at Amey, said: “Amey is grateful to the trustee and its advisers, PIC, XPS, and CMS for their considerable efforts in concluding this transaction alongside, but separate from, preparation for Amey’s recent change of ownership. We are delighted to have played our part in enhancing members’ security, whilst reducing balance sheet risk in line with Amey’s wider pension strategy. We thank our shareholders for their support throughout the process.”
Kim Nash, managing director at Zedra Governance Limited, trustee for the Amey scheme, said: “I would like to thank Amey, PIC, and our advisers for their collaborative approach in getting this transaction done in volatile market conditions. Increasing the security of members’ benefits and reducing risk were top of the trustee’s agenda and we are delighted to have partnered with PIC to achieve this excellent outcome.”
Mitul Magudia, head of business development at PIC, said: “This transaction was undertaken on an accelerated timescale and its successful completion reflects the strong capabilities of all those involved.”
He noted that aligning corporate activity with bulk annuity transactions introduced additional challenges and stakeholders to the decision-making process, adding that, as has been widely reported, “schemes are particularly well funded at the current time, and we hope many schemes are able to make similar announcements over the course of 2023”.
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