UK - Delta has agreed a £451m (€571m) partial buyout with Pension Insurance Corporation (PIC) to insure the liabilities of existing pensioners.

The deal is the first partial buyout to be completed by PIC and the transaction will involve £450.9m of assets being transferred to the insurer in return for annuities for 10,000 existing pensioners who retired before 2008.

The Delta pension plan is currently valued at around £600m, but it has agreed to move two-thirds of the scheme assets, worth approximately £400m, to PIC while Delta, as the sponsoring employer, will provide the remaining £49.7m in return for removing the liabilities from its balance sheet by the end of the year.

Chris Massey, head of pension risk transfer at PricewaterhouseCoopers (PwC), which acted as adviser to Delta for the transaction, pointed out "the Delta Pension Plan is significantly larger than the Delta business".

And he added "this transaction removes a substantial amount of that burden from the business for the benefit of shareholders and pensioners alike".

As a result, David Collinson, head of liability acquisition at PIC, noted although the premium paid by Delta for the buyout was above the IAS19 valuation of the pensioner liabilities, the company's share price has increased "by about 9%" since the announcement as the market is "rewarding the company for removing these liabilities".

Collinson revealed PIC had been in discussions with Delta for two years over various approaches to reducing pension liability, but it was decided in the end insuring pensioners' assets was in the best interests of both the pensioners and the remaining 8,000 members of the pension plan.

In a statement Delta also revealed the trustees of the pension plan are assessing the "further benefits of an enhanced transfer value scheme through which the Group would offer deferred participants the option to transfer out of the plan in return for their statutory transfer value plus a separate financial incentive".

It admitted that enhanced transfer value scheme would take nine months to complete, and would require further group payments, but argued in combination with the PIC deal, "the size and risks associated with the plan will be substantially reduced". 

Delta added "as the size of the residual plan will be more proportionate to the group and will be comprised of longer-term liabilities, the residual plan's investment strategy will allow exposure to equities, affording some possibility of gains through outperformance".

That said, it admitted over the longer term "the possible implementation of a liability driven investment (LDI) strategy or purchase of additional annuities for the residual liabilities will be considered further".

This transaction means PIC now has more than £500m defined benefit pension assets under management, following its first full buyout with Swan Hill Pension Scheme last week.

But recent research from Punter Southall claimed the current low pricing levels in the buyout market is "unsustainable" and warned a lack of growth may lead to some insurers withdrawing from the market or merging with other players.

But Collinson added: "I don't think the market is unsustainable. There is clearly significant pent up demand evidenced by the significant rise in requests we have received over the past few months."

"As in any market the price will be the point at which both the buyer and seller are willing to transact.  There is no doubt that at the moment insurance pricing is more attractive than historical levels." 

He also pointed out that "a few years ago commentators were saying that IAS19 placed an unrealistically high value on pension liabilities, the fact that Delta's share price has gone up by 10% after it has bought out the liabilities shows that people's expectations regarding the true cost of pension liabilities has moved upwards significantly in the last few years".

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