The TRW Pension Scheme has transferred £2.5bn (€3.1bn) in liabilities to Legal General (L&G) in an uncommon partial-buyout arrangement that breaks the UK record for a single transaction.
The scheme, sponsored by service provider to the automotive industry TRW Automotive, transferred around 78% of its liabilities in the all-pensioner buyout.
The £3.5bn scheme has around 46,000 members, transferring the plans of 22,000 pensioners to the insurer and retaining £1bn of liabilities, mainly deferred members.
Neil Marchuk, chair of the trustee board, said the deal was a material de-risking process providing security to the insured members.
Joseph Cantle, CFO at TRW Automotive, said the partial buyout significantly improved the company’s balance sheet, transferring the liabilities to L&G.
A partial buyout is where pension schemes transfer liabilities in their entirety to an insurer but do not wind down.
A buy-in is the exchange of liabilities for an insurance contract against future payments held as an asset by the scheme.
The scheme and its advisers had been working towards the deal for some time, running other risk-reduction exercises such as pension increase exchanges (PIEs) and enhanced transfer values (ETVs).
Insurance quotes remained in the scheme’s favour given the deal’s record size and the intensely competitive bulk annuity market – particularly since the Budget reforms in March.
James Mullins, partner at consultancy Hymans Robertson and adviser to the scheme, said its complex investment hedging had been beneficial in securing the timing and pricing of the deal.
The PIE exercise, accepted by just under 40% of members, had made quoting simpler for L&G, as the scheme indexed using the consumer prices index (CPI), a notoriously difficult index to hedge.
A PIE exercise sees the member accept an inflated initial pension payment in exchange for the waiving of annual index increases.
“This deal could be the catalyst for partial-buyout,” Mullins said. “This scheme was not exceptionally funded, so a buyout looked a long-way off. But the series of steps undertaken meant they have been able to partially buy out two-thirds of the scheme.”
The deal represents L&G’s second record-breaking deal of the year, after it insured £3bn of liabilities in a buy-in with the ICI Pension Fund.
Managing director of L&G Retirement Kerrigan Procter said: “We have worked with the scheme over many years as they moved from index funds to liability-driven investment, and now to buyout with L&G.”
The insurer has now dominated 2014, writing more than £8.3bn in bulk annuities, more than the entire 2013 market.
The 2014 market is now expected to break the £11bn mark, with consultancies reporting hundreds of millions worth of transactions before year-end.
Mercer’s David Ellis, lead adviser to the pension scheme on selecting L&G, said while it would be pleased with its 2014 performance, other insurers would not be feeling the pinch.
“The year before, Pension Insurance Corporation (PIC) did very well, and Rothesay Life bought MetLife, which was a multi-billion deal as far as it is concerned,” he said.
Mullins added: “Next year will be great as well, with L&G and Prudential and others even more keen to transact to make up for falling individual annuities sales – which is great for competitive pricing.”
Bulk annuity pricing power is expected to “see-saw” between insurers and pension schemes as a variety of market and competition factors take hold, according to consultancy LCP.