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Pension Corporation backs innovative £850m buyout

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Pension Insurance Corporation (PIC) has backed an £850m (€960.4m) buyout of the pension scheme of UK consultancy group PA Consulting.

The specialist insurance group agreed to take on responsibility for the pensions of roughly 2,400 members of the PA Pension Scheme.

The full buyout meant PIC insured £3.2bn worth of liabilities from UK defined benefit (DB) pension funds in the first half of this year, an increase of 68% on the first half of 2017.

Alongside the buyout, the company also undertook a pension increase exercise, which involves offering members an initial uplift in their annual pension payments at the expense of future inflation-linked increases.

An enhanced transfer value exercise – designed to make it more attractive for members to take their full benefits out of the scheme and into another arrangement – was also carried out, with members given access to free financial advice.

The two measures helped reduce the final cost of the buyout transaction, according to Aon, which advised PA Consulting on all aspects of the deal.

Ben Roe, head of the member options team at Aon, said the deal was “a first in the market and has proved to be a genuine win-win for all parties”.

“Members have had the opportunity to take advice on an option that may not be available at this level again in the future,” Roe said. “It was a key element in the process of a successful full buyout.”

John Baines, head of bulk annuities at Aon, said: “Securing this transaction at a much lower cost than anticipated at the start of this journey is an outstanding result. The innovative structure to integrate member options within an insurance transaction allowed attractive terms to be locked in much more quickly than normal.

“The ability to achieve this in a Solvency II environment is particularly pleasing, and following a relatively quiet year for large full scheme transactions in 2017, looks set to lead the way for many similar deals in a bumper 2018.”

Kully Janjuah, director and company secretary of PA Consulting, said the firm had put in “significant time and effort” to secure the pension scheme, aided by private equity firm The Carlyle Group, which owns 51% of the company’s shares.

De-risking spike predicted as schemes approach full funding

Meanwhile, Mitul Magudia, head of business development at PIC, said his company had “a strong pipeline of business ahead”.

“As things stand, we see it being a record year for the bulk annuity market with more than £20bn worth of buy-ins and buyouts expected in total,” he added.

UK schemes have been urged to consider de-risking as they have approached full funding in aggregate, according to new data from JLT Employee Benefits.

The pensions consultancy estimated that UK private sector DB schemes were 98% funded at the end of June, with combined assets of £1.57trn and liabilities of £1.61trn.

Murray Wright, deputy chief actuary at JLT Employee Benefits, said higher corporate bond yields and “solid” equity markets had boosted funds, but warned: “A bull market that is almost 10 years old can’t be relied upon to keep delivering results.”

He estimated that schemes reaching full funding now needed to earn an annual return of less than 3% in order to pay benefits as they fell due.

“Pension schemes that are ahead of schedule on their funding plans should actively seek to minimise their reliance on the sponsor through an integrated funding and investment strategy linked to expected scheme cash flows and at the same time de-risk their liabilities,” Wright added.

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