Engineering group speeds up derisking as market nears £30bn

The deal, finalised on November 26, eliminated all of Renew’s exposure to investment and funding risks in the scheme. Following this buy-in, and previous transactions in 2011 and 2016, all of the defined benefit scheme’s liabilities will now be matched with corresponding annuities. 

Sean Wyndham-Quin, Renew’s chief financial officer, noted that the transaction “significantly derisks the group’s balance sheet, further reduces the group’s pension exposure risks, and improves the group’s cash flow in the medium term”.

From 2022, the deal will improve Renew’s cash flow by £4.2m a year, the amount previously paid into the Lovell Pension Scheme.

In a crowded market, well-prepared schemes can grab insurer attention and make volatility their friend to capture opportunities

Andrew Ward, Mercer

Since no further material contributions will be made to the Lovell scheme, Renew’s board is looking to divert these into another of its DB pension funds, the Amco Scheme, which had a £3.4m deficit at the end of 2016.

The company predicts that “diverting the equivalent of one year’s worth of contributions from the Lovell Scheme into the Amco Scheme is likely to be sufficient to achieve a buy-in of its remaining liabilities”.

This will allow Renew to fully buy-in Amco’s scheme “liabilities over a shorter time scale than had previously been envisage”, it stated.

Ralph McClelland, partner at Sackers, explained that the transaction looks like part of a standard series of buy-ins, but it “has enabled the sponsor to look at diverting contributions to another scheme within the group, which must be a good outcome for the pensioner population”.

“We are increasingly seeing joint trustee/company initiatives that can work very well with the right governance framework,” he noted.

The stream becomes a torrent

This deal, along with other year-end initiatives, could see the total number of buy-ins and buyouts in 2020 top the 153 transactions of 2019.

But James Mullins, head of risk transaction at Hymans Robertson, says he expects the average transaction size “to be lower than the £286m we saw in 2019, and so the total transaction value in 2020 for buy-ins and buyouts is likely to be a little under £30bn”. This figure represents around two-thirds of the 2019 total of £43.8bn.

In a report published on Thursday, Barnet Waddingham, which is also predicting the derisking market to reach £30bn this year, stated that £12.6bn of buy-ins and buyouts were completed during the first half of 2020. Gavin Markham, partner and head of bulk annuity transactions at the consultancy, wrote that this shows “the bulk annuity market has been able to successfully navigate the challenges thrown up by the Covid-19 crisis during this period”. 

He noted it was the second busiest first half of the year in history, “which given the backdrop is notable”.

Mr Markham explained that some of the schemes transacting in the spring were able to take advantage of attractive pricing relative to gilts offered by certain insurers, “reflecting the material widening of corporate bond credit spreads in response to the developing Covid-19 crisis, both in relation to UK and US corporate credit”.

This means that in practice, “those schemes that were already in the market, or had much of the transaction infrastructure in place, were able to take advantage of this relatively fleeting opportunity”, he added.

Old British Steel tops single transactions

The largest single transaction in 2020 was a £2bn buy-in of the Old British Steel Pension Scheme with Pension Insurance Corporation, and the £1.6bn partial buy-in of the Merchant Navy Officers Pension Fund, also with PIC. The Co-op Group has secured £2.75bn of liabilities across a series of buy-ins with PIC and Aviva.

Longevity swaps have also continued. According to Thomas Crawshaw, senior actuarial consultant at K3 Advisory, there was £16bn of longevity swap transactions completed in 2020, including a £10bn deal by Lloyds Banking Group schemes.

“While we await the first superfund transactions, a small number of risk transfer transactions using alternative methods or products have also taken place,” Mr Crawshaw noted.

Another milestone reached this year is that 40 per cent of FTSE 100 companies that sponsor DB pension schemes have now completed buy-ins, buyouts or longevity swaps.

The bulk transaction market is expected to continue to grow, with Mercer forecasting close to £60bn of bulk annuities, longevity swaps and new risk transfer solutions in 2021.

Andrew Ward, head of risk transfer and DB journey planning at Mercer, said: “2021 will be the busiest year yet. If I had three words of advice for sponsors and trustees looking to transact in the next few years, they would be preparation, preparation, preparation.

“In a crowded market, well-prepared schemes can grab insurer attention and make volatility their friend to capture opportunities.”