Midlands-based brewer Marston’s has bought in more than a third of its pension scheme liabilities since 2013 through a series of deals aimed at reducing volatility across its long-dated obligations and providing added security for members.
A buy-in is a derisking tool whereby a scheme uses a proportion of its assets to buy an insurance policy to secure an income stream that matches its liabilities. The insurer takes on responsibility for meeting the obligations to the pensioner group, thus providing members with additional security.
The independent pub retailer and brewer’s £450m scheme completed three tranches of pensioner buy-ins in 2013, 2014 and this year, worth a total of £180m.
Andrew Andrea, Marston’s financial director, said the company had deployed a “salami slice” approach to its sizeable liabilities after low bond yields pushed the scheme deficit out to £50m on an actuarial basis.
“We’ve done it in chunks rather than trying to buy in the whole scheme,” said Andrea.
Open to offers
The first three buy-in deals were undertaken as separate projects, but Marston’s is steering towards a more fluid approach to derisking its remaining liabilities.
Ultimately, we want this thing off balance sheet because we run pubs and brew beer
Andrew Andrea, Marstons
“We’re trying to establish a process whereby the buy-in partners have visibility of the data and can offer to buy in,” he said.
Andrea said clean member data was crucial to pushing through each buy-in tranche and will improve oversight for further transactions. The scheme also completed its guaranteed minimum pension reconciliation work earlier this year.
Favourably priced
Bulk annuities continue to offer an attractively priced matching asset, particularly relative to gilts or a liability-driven investment portfolio, according to consultancy Aon Hewitt’s November bulk annuity market update.
Consultancy LCP, in its annual buyout report published this week, said price competition for buy-ins had remained strong throughout the year but added: "2015 saw increased price variation between insurers and some insurers were noticeably more selective in pursuing transactions as they worked through the emerging details on Solvency II."
Charles Cowling, managing director at consultancy JLT, said current pricing for pensioner buy-ins remains very attractive for schemes compared with gilts, but that further downward movement in long-term rates has pushed up the absolute value of annuities.
“Psychologically, it’s harder for investors of any description, trustees included, to buy an asset that has gone up a lot in the last few years,” he said.
But Cowling added trustees with a sustained conviction that interest rates will rise faster than the market predicts stand to lose out.
“That position has been proven wrong since the financial crisis,” Cowling said. “Annuities are at historic highs – but so are gilts. These things are all relative.”
Trustee negotiations
Marston’s agreed a £6m annual reduction to deficit contributions with scheme trustees following the September 2014 triennial valuation. The employer will now pay £8m, rather than £14m, towards the £50m scheme deficit each year. On the latest company balance sheet the scheme had a £15m pre-tax surplus on an accounting basis.
Andrea said the company enjoys a good relationship with trustees, with a proactive approach to tackling the deficit supporting the negotiations.
“Our philosophy is, ultimately, we want this thing off balance sheet because we run pubs and brew beer,” said Andrea.
“Some of my peers are of the view it’s a long-dated issue, kick it into the long grass, but I don’t accord with that – you’ve got to positively and proactively deal with your pension.”
Darren Redmayne, managing director at covenant specialist Lincoln Pensions, said Marston’s removal of risk from the scheme liabilities made a strong case for reducing deficit contributions.
Across UK plc more broadly, Redmayne said the typical six or seven-year tenure of financial directors can encourage a short-term view of pension scheme risk, creating problems for the future if short-term strategic decisions do not play out.
“A good relationship of mutual understanding is what people should strive for,” said Redmayne.
