UK - Friends Provident has completed the first FTSE 100 'buy-in' of a defined benefit (DB) pension scheme and signed a deal with Norwich Union valued at £350m (€439m).

Trustees of the Friends Provident Pension Scheme (FPPS) - valued at approximately £1bn with a £5m surplus at the end of 2007 - have agreed a deal which will transfer the responsibility of around 3,000 existing pensioners to Norwich Union in the form of £350m assets, in return for a bulk annuity contract.

Whereas in a traditional 'buyout' the individual policies are held outside of the pension scheme by the insurer, and the premiums are paid directly to members, in a "buy-in" the policies "sit within the trust" and the payments are made from the insurer to the trustees.

James Staveley-Wadham, senior consultant at Towers Perrin - the firm which advised the trustees - said this way the annuities are held as an investment in the plan and the money continues to be passed from the trustees to members as normal.

He added: "Trustees have addressed that mortality risk, but for members its business as usual, as they still get their premiums but trustees are getting the money from Norwich Union."

Towers Perrin also pointed out apart from being the first FTSE 100 to complete a 'buy-in' of its existing pensioners, the deal has also agreed terms which will allow the scheme to recover a proportion of the £350m assets passed to Norwich Union - soon to be re-branded as Aviva - if something goes wrong.

Staveley-Wadham said: " Normally in these transactions there is no surrender value, so if there's a problem with the insurance company the scheme wouldn't be able to get their assets back and would fall on the mercy of either the Pension Protection Fund (PPF) or the Financial Services Compensation Scheme (FSCS)."

The assets will be managed by Norwich Union as part of its bulk purchase annuity portfolio, but Staveley-Wadham claimed "in the unlikely event of something going wrong at Norwich Union" - either suddenly overnight or built up over a period of time - there is the ability "for trustees to recover a proportion of the assets".

Mike Hampton, chairman of the FPPS, said: "Scheme benefits and how they are paid are unaffected. But this investment means that we have an asset that will pay out exactly what we need to meet our pensions in payments. It is an example of the rigorous approach to risk management taken by both FPPS and Friends Provident."

The "buy-in" deal was concluded in just two months, and Towers Perrin suggested while buy-ins have been around for a while, they are now "becoming more commonplace than in the past".

The deal swiftly follows the first FTSE 100 buyout deal earlier this week, when Lonmin agreed to transfer its remaining DB liabilities to Paternoster, and put the buyout market on track to reach 10bn in 2008. (See earlier IPE article: Mining giant secures first FTSE 100 buyout)

Charlie Finch, partner at Lane Clark & Peacock (LCP), highlighted that "half of the 14 buyout transactions over £100m since January 2007 have been continuing schemes de-risking their investments through a pensioner "buy-in" such as this and we see "buy-in" strategies increasingly becoming the norm as a way for schemes to reduce risk".

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