Trustees of the defined benefit scheme for a Yorkshire engineering consultancy’s staff are actively monitoring the bulk annuity market, after two completed transactions and improved funding levels.
The £351m Pension and Life Assurance Plan of NG Bailey entered into two pensioner buy-in transactions in January and February with Just Group, totalling £66m of liabilities insured. The scheme, which had a £32.6m accounting surplus as at the date of its sponsor’s latest accounts, has already covered around £50m of liabilities via a 2017 ‘top-slicing’ transaction.
Now, the scheme and its advisers say that the plan is taking advantage of its strong position to “actively watch the insurance market” for opportunistic deals.
Mike Porter, NG Bailey’s financial director, says this spirit of opportunistic derisking informed its previous decisions to pass liabilities to Just: “As a proud family business with a long tradition of looking after our employees throughout their careers and into retirement, we were keen to secure the benefits of our pensioners at a cost that worked for shareholders and trustees.
What you can do is say to that insurer, ‘if you can hit this target we’ll transact’
Chris DeMarco, Legal & General
“We managed to achieve a deal that had little impact on either the scheme or company’s finances while materially reducing the risks posed by the scheme,” he adds.
NG Bailey becomes one of a growing number of opportunists searching for buyout, but at the right price. Dislocations in the corporate bond market, which drives insurer pricing, appeared throughout March this year and led to a flurry of deals
Jon Sharp, NG Bailey’s sole trustee and director of Western Pension Solutions, says: “One of our key strategic aims is to be able to seize market opportunities when they arise, and so we are delighted to have concluded these transactions.”
The scheme has now insured all of its pensioner population, but has a cohort of deferred members that is maturing rapidly, according to advisers.
One insurer or multiple?
For schemes with an eye on bulk annuities, but only at a specific price, dynamism and ability to transact quickly are crucial. Corporate bond yields had erased almost all of their widening by the end of April, meaning only the quickest were able to transact.
Adam Davis, managing director at K3 Advisory, which advised NG Bailey on its latest transactions, says many plans waste insurers’ time through multiple rounds of pricing.
“As an ex-director of pricing at an insurer, I believe this can’t be more wrong — it just causes delays, puts insurers off and increases the consulting costs. Set the insurers a tough price target and run a simple process,” he says.
NG Bailey instead set a price target equivalent to a return of 50 basis points above gilts, which was beaten by four out of the five insurers that quoted, with a 5 per cent difference in price between them.
“Getting as many insurers to participate as possible will lead to best pricing, especially for smaller schemes where the price differential between insurers can be more material,” Mr Davis says.
“Making sure small schemes are prepared (meaning data, benefits, governance and truly understanding the impact of the trade on funding, accounting, risk, investment strategy…) and then running an efficient and simple broking process, we believe, gives the best chance of attracting insurers.”
Chris DeMarco, managing director of UK pension risk transfer at Legal & General, agrees that schemes need to take steps beyond simply cleaning data if they are to be truly opportunist.
Pensions administrator suffers ransomware attack
Pension companies have been warned to be on their guard against ransomware attacks, after industry insiders confirmed to Pensions Expert that at least one administrator was subjected to a ransomware attack in the past week.
With data cleansed, quotations can typically take between five and seven weeks — much longer than the opportunities seen recently have lasted.
But he disagrees over the number of rounds that may be appropriate, arguing that schemes need to be well engaged with the market to transact quickly. “I think what schemes ought to be doing is getting some kind of first round pricing from the market, and then making an assessment, based on that, as to whether they want to work with one insurer or a couple of insurers,” he says.
While Mr DeMarco acknowledges the competition that can be driven between insurers, he adds: “What you can do is say to that insurer, ‘if you can hit this target we’ll transact’.
“That allows the insurer to basically go out and purchase the assets, knowing that the scheme’s effectively given them an order.”
Future uncertain for markets
Advisers have predicted that 2020 will again see strong demand from DB schemes for bulk annuities. But on the question of pricing, Mr DeMarco says the future looks less certain.
“It’s very much dependent on what happens over the next six months, and the financial fallout that might take place. That’s obviously very difficult to predict — even when the numbers in all of the western hemisphere look pretty bad, the markets continue to rally,” he says.
Indeed, while bulk annuity prices dropped, sponsor health also looked shaky, and the ensuing rise in both the cost of insurance and DB liabilities has meant some have not recovered from March.
“We’ve seen some schemes that were looking at full scheme buyout now looking at buy-ins because the buyouts aren’t affordable any longer — sponsors don’t have additional cash to put in,” Mr DeMarco says.
“I don’t think it’s going to be a fire sale in the fourth quarter, but there still may be a fair amount of capacity, and it will favour those schemes that are set up to transact quite quickly.”
