4imprint hits home straight with buy-in conversions

Buyout may seem like a distant dream for many schemes in the current low-yield environment, and the introduction of Solvency II at the start of the year – pushing up the price of insuring deferred members by around 3 per cent – has only added to the challenge.

Despite this, 2015 was a buoyant year for transactions, with £11.6bn of deals struck in the year to September. Buy-in volumes exceeded buyouts in aggregate – £6.4bn against £5.2bn – according to consultancy Hymans Robertson.

The growth of medically underwritten deals was a dominant theme in 2015, and home improvement retailer Kingfisher’s announcement last week of a £228m medically underwritten buy-in, the largest to date, has set a new precedent for the industry.

It’s about realism. If the total cost of the derisking process – a series of transactions – is too expensive, you may not want to do one

Jerome Melcer, PwC

Converting to buyout

Gift distributor 4imprint has made significant progress securing the liabilities of pensioner members over recent years, mitigating the risk of nearly 80 per cent of the scheme’s liabilities through two buy-in transactions.

In September 2012 the scheme entered a £25.2m buy-in agreement with Pensions Insurance Corporation, producing an income stream to cover future payments relating to 481 pensioners – about 20 per cent of the scheme’s total liabilities.

Two years later, trustees agreed a £65.5m buy-in with Prudential for 567 pensioners, roughly 57 per cent of liabilities.

In its latest annual report, the US-based company announced it had agreed the terms for conversion of these two transactions to buyout, substantially reducing the size of the remaining legacy obligation and lowering deficit reduction contributions.

A one-off contribution of £10m will be paid into the scheme, as a result of which the remaining net deficit, relating primarily to deferred members, is expected to be reduced by around half from its current level of slightly more than $23m (£16.2m).

Transaction series 

Jerome Melcer, director at consultancy PwC, said it is crucial for schemes to get a “good grasp” of what their total strategy would look like and consider whether that is viable in terms of resources, before embarking on the first stage.

“If your strategy is to do a series of these transactions you also need to look at the second and third transaction. It’s more about realism [and] the total cost of the derisking process.”

Melcer said the conversion from partial buy-in to partial buyout can be a complex process, demanding a “deep dive” into the legalities and nuances of the scheme structure and the membership demographic.

“Doing a partial buyout includes letting go of a significant chunk of assets of the scheme,” Melcer said. “Are you paying due regard to members remaining in the scheme? It’s quite common that members left behind are living with some form of deficit.”

However, Melcer said this type of deal had been executed several times in the market for the Delta, Next and TRW schemes, noting that additional security for remaining members could be achieved via an accelerated recovery plan or cash injection at the point of transaction.

Covenant strength

Shelly Beard, senior consultant at Willis Towers Watson, also said the structure of the partial buyout was unusual given it did not relate to all scheme members.

“Trustees and the scheme actuary need to be confident to guarantee fairness across the scheme,” she said. “It needs to be talked through.”

Tiziana Perella, head of buyout at consultancy JLT Employee Benefits and adviser to the trustees of the 4imprint scheme, said if a strong sponsor stands behind the transaction, a partial structure should not present a “big problem”.

Perella said this is the case for 4imprint, where work on each of the transactions had been very well integrated between trustees and the company.

“Trustees had a set trigger for both transactions with the sponsor,” she said. “[They took] all legal and actuarial advice in relation to both transactions.”