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ICI Pension Fund secures record-breaking £3.6bn of liability insurance

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ICI Pension Fund has moved to insure £3.6bn (€4.3bn) of its liabilities, securing contracts with Legal & General and Prudential as pricing and appetite in the market continues to benefit larger schemes.

In a novel deal, it sees ICI insure a significant chunk of its £10bn in relatively mature liabilities, with its membership split between 50,000 pensioners and 10,000 active and deferred members.

Two insurers will take on the buy-in tranches, with Legal & General taking on £3bn and Prudential the remaining £600m.

The scheme, and its sponsor AkzoNobel, which merged with ICI in 2007 to form the current company, said the deal was struck to improve the security of member benefits and reduce risk in the fund.

The decision to use two insurers was made after a lengthy competitive tender process and led the scheme, with advisers LCP, to negotiate preferable agreements with both parties.

Despite the addition work involved in the use of two insurers, the arrangement still offered the best overall value, and puts it in good standing to insure further tranches of liabilities in future.

Heath Mottram, chief executive at the fund, said the insurance contracts further build on the fund’s strong de-risking foundations.

“The transactions are the result of significant work by the Trustee over the last six months, including a thorough selection process and negotiation of competitive pricing and terms,” he said.

The ICI fund’s move to insure £3.6bn of liabilities overhauls the previous UK record of £1.5bn in a single scheme transaction, which was between the EMI Pension Fund and Pension Insurance Corporation (PIC).

Clive Wellsteed, partner at LCP and lead adviser to the trustee on both deals, said the fund used its scale to negotiate the very competitive terms agreed by the insurers.

“It demonstrates the appetite of mature final salary schemes to de-risk their pensioner liabilities and shows how transactions can be successfully structured at a scale not previously seen,” he said.

Wellsteed also highlighted the significant interest of insurers operating in the market, with both Legal & General and Prudential outstripping their entire volume of bulk annuity business from the previous two years in this single deal.

Legal & General wrote just over £2.3bn of buy-in and buyout business since the start of 2012, according to LCP, although it did conclude the purchase of Lucida, adding a further £1.4bn of written policies

Prudential wrote £566m over the two years, as the total bulk annuity market reached £11.8bn.

“This is certainly a statement of intent by the insurers as well, who will have had their appetite wet by last week’s Budget, and will now consider diverting their focus from individual annuities towards the bulk annuity space,” Wellsteed said.

Last week, the UK government announced plans to overhaul the at-retirement DC market, removing compulsory annuitisation for defined contribution savers, potentially hitting the sale of individual annuities by insurance companies.

This led to several calls from industry experts that the bulk annuity market would see additional competitive pricing, particularly from those insurers with a heavy reliance on individual annuity sales, such as Prudential and Legal & General.

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