Innovative pension insurance buy-out transaction

Barnett Waddingham have advised the Trustee of the Lloyd’s Superannuation Fund (LSF) on an innovative pension insurance buy-out transaction worth over £40 million, securing liabilities with Pension Insurance Corporation (PIC). 

The LSF, established in 1929, is a multi-employer defined benefit pension (DB) scheme whose members are employees and former employees of some of the companies, past and present, associated with the Lloyd’s of London insurance market, the world’s specialist insurance market.

A participating employer left the LSF during 2013 and the scheme faced a period of financial risk – for four weeks they were exposed to substantial market movements whilst waiting for a section 75 debt to be calculated and paid.

We sought from insurers an innovative mechanism to fix the premium for the bulk annuity contract over the four weeks prior to the premium being paid and the contract being secured.
 
By fixing the premium, market fluctuations in pricing during the four week period were eliminated.  This is the first time this type of fixed premium has been used in a pension insurance buy-out.
 
Eric Stobart, Chairman, LSF Trustee said:  “The LSF Trustee had clear objectives for this exercise, particularly around minimising risk.  As a last man standing scheme any shortfall between the S75 premium and the buy-out price would have to be met from the remaining scheme assets.  Once the exiting employer agreed to work with the Trustee on this, we were pleased that the hard work and innovative approaches of Barnett Waddingham and Pension Insurance Corporation meant we were able to agree a type of fixed premium mechanism within the short timescale available.  The Trustee was surprised that this particular mechanism had not been used before, and expects that other schemes may wish to consider this in future.”
 
Danny Wilding, Partner, commented:   “Our advice focused on how we could help the pension scheme trustees avoid a real financial cost in volatile market conditions.  We obtained a variety of approaches from different insurers and were able to recommend the flexible mechanism used by Pension Insurance Corporation.”

Notes to editors:

Summary of Transaction

• The second largest participating employer recently exited the LSF triggering a “section 75” debt on that employer.
• The LSF Trustee decided to use part of the debt proceeds to secure a £40m bulk annuity contract to insure the parented liabilities of the exiting employer.  The LSF Trustee wanted as much certainty as possible around the insurance cost and the exiting employer agreed that it wanted to help the Trustees to minimise market risk.  The LSF Trustee was advised by Danny Wilding and Richard Gibson of Barnett Waddingham on the transaction, with Sackers LLP as legal advisors for the Trustee and Herbert Smith for Pension Insurance Corporation.
• A section 75 debt crystallises on the date that the employer exit takes effect, and the legislation does not allow adjustment for subsequent market movements.  This would mean that the risk of movements in the annuity price would be borne by the pension scheme.
• Barnett Waddingham sought from insurers an innovative mechanism to fix the premium for the bulk annuity contract at the crystallisation date, with the fixed premium period providing sufficient time for the section 75 debt methodology to be agreed between the LSF Trustee and the exiting employer, and to be calculated by Barnett Waddingham. This was achieved despite a period of only a few weeks being available to agree the section 75 methodology.
• As far as Barnett Waddingham and Pension Insurance Corporation are aware, this type of fixed premium mechanism has not been used previously.
• A small initial premium was paid to Pension Insurance Corporation on the crystallisation date, which served to fix the remainder of the premium for a period of four weeks, during which time the section 75 debt was calculated and certified by Barnett Waddingham, agreed and settled between the LSF Trustee and the exiting employer, with the balancing premium then paid to Pension Insurance Corporation, all without any market exposure for the LSF Trustee.

The graph above demonstrates the volatility of the market in the period leading up to the transaction and how the fixed premium option was able to remove the Trustee’s exposure to this volatility during the calculation and payment period.