600 Group completes buy-in ahead of scheme wind-up

After the wind-up of the scheme, expected to take place by April 2019, and less the statutory tax charge of 35 per cent, 600 Group expects to receive a one-off cash payment from surplus funds estimated to be $4m-$5m.

There were a lot of restrictions on us because of the size of the scheme relative to the company

Neil Carrick, 600 Group

“It has been a long, old haul” explains 600 Group’s finance director, Neil Carrick. The road to buyout began in 2013 with the closure of the DB scheme, which has 2000 pensioners and 800 deferred members, to future accrual and new members.

It was a question of the tail wagging the dog, with the 600 Group DB pension scheme 10 times larger than the market capitalisation (£20m) of the company.

Carrick said: “There were a lot of restrictions on us because of the size of the scheme relative to the company. It had debenture security, restrictions on us paying dividends, lots of onerous undertakings. That has now been lifted off the company and we have started paying a dividend again.”

Preparing for the end game

In the years leading up to buy-in, the scheme, which had a £10m surplus on a gilts-only prudent trustee valuation basis, carried out several liability reduction exercises, including a pension increase exchange exercise.

This produced a good response “as many members with quite small pensions were happy to get a larger increased pension now rather than an escalating one when they didn’t need it so much in later years”, said Carrick.

It carried out enhanced transfer value exercises with less success. There was also a final communication before the buy-in, offering members an opportunity to transfer if they wanted to, but the take-up was low.

Unusually, data cleansing was not a big issue.“Our data wasn’t too bad because Mercer had been involved with the scheme for a long time, so at least we had the history,” Carrick said.

“Tracing the deferreds was more problematic, but in the end only a handful could not be found,” he added.

Short-term considerations

The company, with the help of its advisers, searched the full market and ended up with four or five firms quoting before settling on Pension Insurance Corporation.

“We used Mercer. We were getting feedback from them whether the market was OK or not. It went on for about 18 months in terms of putting feelers out to the marketplace,” according to Carrick.

Timing was one of the problems because of the need for everything to align. Insurance company capacity, both financially and also on the administration side, was also a factor.

Reflecting on the transaction, Carrick said: “Members have taken the change reasonably well. I don’t think there was any animosity. It has been a good deal for them as they are getting greater security.”

The bulk buy-in policy fully secures all the liabilities of the scheme, with each member receiving individual policies before the scheme moves to full buyout – when the trustees will wind the scheme up and refund whatever is left back to the company. This is expected to happen in April 2019.

Aon were the actuarial advisers for the trustee and the company used Buck*.

Consider impact of different risk profiles

Looking at the bigger picture, Francis Fernandes, senior adviser at covenant specialists Lincoln Pensions, said: “Many DB schemes that were closed several years ago are now reaching maturity, so a high percentage of their liabilities relate to pensioners.” 

He noted that these begin to look more and more like annuity books run off by insurers, so passing them on to a strong insurer may be sensible. 

“Insurers offer different risk profiles. Trustees and sponsors need to be alive to the impact these differences have on the security of members’ benefits,” Fernandes said.

Insurers have a pipeline of more than £25bn of transactions lined up for H1 2019, which is leading them to be more selective as to which transactions they prioritise. 

Charlie Finch, partner at LCP, said schemes looking to buyout should make sure everything is properly lined up before they go to market.

Patience is key

“When insurers decide which transactions to pursue, they will take account of how prepared the pension plan is and the likelihood of the transaction proceeding,” he said.

The derisking market is buoyant, with experts at Hymans Robertson expecting the transaction total for 2018 pension scheme buy-ins and buyouts to exceed £20bn.

James Mullins, head of risk transfer and buyout solutions at Hymans, said: “If all decision-makers are aligned and keen to progress quickly, the whole process can be completed in less than four months.”

He added: “Given how busy the insurance companies are at the moment, it would be wise to be patient and allow more time to ensure a pension scheme obtains the best possible pricing.”

*Updated to reflect Buck's recent re-branding