Global engineering group GKN signed off a second pensioner buy-in during 2015, insuring an additional £47m of pensioner liabilities, as part of a broad strategy to manage asset and liability risk as the group’s UK schemes mature.
The aggregate deficit of FTSE 100 and FTSE 350 schemes has continued to increase over the past 12 months, despite some recovery in equity markets during the period.
The pension burden on the UK’s private sector swelled £5bn to £273bn during the year to March 31, underscoring the need for UK schemes and sponsors to reassess their risk management frameworks.
Those schemes who are sitting on gilts which aren’t being used for their LDI or collateral – there is a very compelling message to transfer those into a buy-in
Charlie Finch, LCP
Automobile and aviation engineering company GKN continued to derisk the group’s liabilities, adding a £53m buy-in with insurer Rothesay Life to the £123m deal transacted with the same insurer early in 2014.
The additional bulk annuity covers £47m of pensioner liabilities valued on an IAS 19 accounting basis at December 31 2015, according to the group’s latest annual report.
Shelly Beard, senior consultant at Willis Towers Watson, said doing a series of transactions with the same insurer has become increasingly common in the market, a process eased by the contractual arrangements established ahead of the first transaction.
VA Tech UK scheme buy-in
Specialist DB pension insurer Pension Insurance Corporation concluded a £300m pension insurance buy-in with the trustee of the VA Tech UK Pension Scheme this week. The first £100m of liabilities was insured in 2013, followed by £200m in December 2015, covering the risk of about 1,500 members. A significant proportion of the insured liabilities was then reinsured by Risicom, the captive reinsurer of VA Tech’s parent company Siemens.
“By opening a dialogue with an insurer you’ve set the scene for future transactions,” she said.
Charlie Finch, partner at consultancy LCP, said current pricing for pensioner buy-ins makes for a strong argument for pension schemes to structure buy-ins.
“Those schemes who are sitting on gilts which aren’t being used for their [liability-driven investment] or collateral – there is a very compelling message to transfer those into a buy-in,” he said.
“As schemes progressively reduce the risk in their pension scheme, moving more into gilts, they can afford to move more into buy-in.”
Andrew Parker, director at professional trustee company Law Debenture, said the best course for derisking is scheme-specific – dependent on a range of factors including the scheme maturity, the member demographic and its funding position.
Some sponsors may not want to pursue transactions with insurers, preferring to manage out obligations via contributions, he said.
However, where there is more appetite to tackle risk by insuring tranches of member liabilities, Parker said it is important to garner sponsor backing.
“It’s important to have sponsor buy-in – no pun intended,” he said. “You’ve got to get them on side... there can be a financial impact on the balance sheet.”
Ongoing contributions
In the year to December 31 the group pension deficit of GKN decreased £153m to £1.6bn as a result of changes to the discount rate and additional contributions.
Alongside ongoing efforts to tackle risk, additional annual deficit recovery payments of £10m commenced in 2014, following the schemes’ 2013 actuarial valuation, and under that agreement there is potential for further additional payments to begin this year, contingent on asset performance.
During the year the group paid £30m to its two UK pension schemes via a pension partnership arrangement, first established in 2010, bringing the total expected sponsor contributions for 2016 to £74m.
The group also undertook a pension increase exchange exercise for its legacy defined benefit scheme, GKN1, during the year, offering members the opportunity to exchange future inflationary increases for a one-off payment; taken up by 54 per cent of members, the exercise generated a £7m saving for the company.
Small steps
As the GKN schemes mature, the group also plans to derisk away from growth assets, gradually increasing its holdings in bonds and other matching instruments over the longer term.
In the meantime, the report states, the group “considers that equities and similar assets are an appropriate means of managing pension funding requirements, given the long-term nature of the liabilities and the strength of the group to withstand volatility”.
Charles Cowling, managing director at consultancy JLT Employee Benefits, said trustees and corporate sponsors who continue to maintain the view that interest rates will rise faster than the market have found themselves in an increasingly difficult position – faced with mounting deficits and long-term lows in interest rates.
Trustees may feel bound to uphold this view rather than admit defeat and unwind the risk, Cowling said, for fear of transacting at the “wrong point in time”.
“If you do things in small chunks it’s easier to avoid that risk,” Cowling said.
“I’d still encourage people to take as much risk as possible off the table – but it’s easier for all parties to [do that] in small rather than larger steps.”
