Growing momentum behind derisking solutions

There was a clear focus on derisking activity in the final quarter of 2022 among the 40 UK private pension plans surveyed by Pensions Expert’s sister publication MandateWire. 

Both the number and volume of bulk insurance deals recorded in the period showed an increase, while the pipeline for future deals remained strong as a number of schemes outlined plans to sign contracts in the future. 

Alongside buyout and buy-in deals, pension funds continued to reduce the proportion of equities in their portfolios and raise fixed income in line with endgame strategies. 

We have not only secured the benefits of our 90 members, but we are in a very a strong position to achieve our target objective to buy out

Simon Lawrence, Jarvis Group Limited Pension Plan

There were 11 bulk insurance deals that completed in the fourth quarter of 2022, worth a combined $13.6bn (£11.3bn), a considerable increase on the eight deals totalling $4.3bn signed in the third quarter.

One full buyout was completed by the £13mn Musicians’ Union Permanent Officials and Staff Pension Fund. In December, the fund announced it had signed a deal with Aviva that secured the benefits of all members. 

The remaining deals were buy-ins or longevity swap arrangements. Often, the arrangements were built on past derisking agreements or paved the way for future transactions. 

Eyeing buyouts

For instance, the £69.1mn Robinson & Sons Pension Fund, which agreed a full buy-in of its £44mn of pension scheme liabilities with Legal & General in December, said it was the first step towards the scheme’s ultimate goal of securing a full buyout. 

When market conditions allow – expected to be before the end of this year – the scheme plans to enter into a full buyout once a data-cleanse exercise has been conducted.  

Mirroring the Robinson & Son’s scheme was the £13mn Jarvis Group Limited Pension Plan. Having agreed a full buy-in with L&G in October, trustee Simon Lawrence said: “We have not only secured the benefits of our 90 members, but we are in a very a strong position to achieve our target objective to buy out.” 

Meanwhile, the £3.7mn Field Systems Designs Holdings pension scheme reported it was preparing for a buy-in.

Longevity hedges were being sought by two pension funds sponsored by UK insurer RSA Group. The £3.4bn Royal Insurance Group Pension Scheme and the £5.4bn Sun Alliance Pension Scheme have each received quotes “from a number of parties” interested in providing the contracts, according to newsletters from the two pension funds. 

Away from the insurance space, pension funds derisked by lowering equity exposure or increasing LDI exposure. 

Lower for longer

The £3bn Thales UK Pension Scheme adopted a “lower-for-longer” strategy, reducing the return target for its portfolio to gilts plus 2 per cent a year until it fulfils its investment objectives.  

As part of that lower-risk strategy, the fund reduced its equities allocation target to 20 per cent from around 27 per cent. Divestment began in December 2021 and continued through 2022.

Liability-driven investment was on the cards at the £1.1bn Somerfield Pension Scheme, despite the volatility caused by the UK government’s September “mini” Budget. The supermarket pension fund said it was reducing its exposure to illiquid credit in favour of LDI within its main portfolio. 

Over approximately two years, the pension fund will gradually reduce its target allocation to illiquid credit to 11 per cent from 16.4 per cent, while raising its allocation to liability-hedging strategies to 41.9 per cent from 39.2 per cent. 

James Giles, head of pensions investment and risk for the fund, brushed off the concerns raised by the government’s fiscal statement and told MandateWire the scheme’s plans remained unchanged. 

“On gilt market volatility, we’ve rebalanced in line with our pre-agreed collateral waterfall,” he added.

This article is part of MandateWire’s Europe Deal Flow report