How to do four buy-ins in four months

Context

A large (£11bn) well-funded pension scheme, closed to accrual. A few years ago, it set a “Long Term Ambition” (LTA) to be fully funded on a low dependency basis. As a result of member movements and a good strategic approach to investments it attained this goal ahead of schedule.

During 2019, the scheme completed a move to a board of four professional trustees, with the appointment IGG, as Chair. Part of the reason for this was to introduce the governance regime and the specific experience and expertise required for efficient execution of the next stage in scheme’s journey.

The challenge

Having got the scheme to a good funding position, the assets were de-risked to reduce the chance of deterioration. The main remaining risk was longevity risk. It was going to be very difficult to insure the whole scheme in one transaction due to its size, so it was decided to consider insuring tranches of the pensioners.

Our approach

The trustees coordinated their advisers to approach the market for a buy-in of pensioners. A beneficial pricing opportunity was identified and a large tranche of pensioners was insured in January 2020, in a £1bn transaction covering some 7,000 members. Unlike other schemes, where transactions take place at multi-year intervals (because that fits their plans), the trustees commissioned their advisers to maintain a watching brief on the markets, and another transaction, with a different insurer but also for £1bn and covering a further 7,000 members, was effected shortly after the first, in February 2020. As the Covid-precipitated lockdown came into force in March, further pricing opportunities in the bulk annuity market arose and subsequently two transactions of £400m and £350m (covering 2,000 and 2,300 members respectively) were completed a few weeks later.

The outcomes

In the space of four months, four medium to large buy-ins were effected, one each month, with two different insurers, covering over 18,000 members and insuring £2.75bn of liabilities (almost 25% of bulk annuity volumes in the market in H1 2020), thus de-risking over 25% of PACE’s liabilities.

This was possible because of the efficient governance process enabling rapid decisions in the complex environment of a bulk annuity process, two of which took place whilst the initial impacts of Covid on business and financial markets were still emerging. The maintenance of momentum resulted in advisory cost savings too as with longer intervals there is some element of “starting again”.

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