Achieving fixed price key to Arnold Laver buyout

The financial director of Arnold Laver has claimed its successful buyout relied on achieving a fixed price with the insurer to ensure the process ran smoothly.

Buyout is increasingly attractive to companies with closed defined benefit (DB) schemes as it removes pension liabilities from the company’s balance sheet. It also secures members' retirement income.

But the lack of easy access to capital has meant parent companies are currently less inclined to pay for a buyout transaction without more security over the full cost.

Buyout pricing typically works with the insurer providing the scheme with an indicative price in the months leading up to transaction.

However, the price can move dramatically if market conditions and the value of the scheme’s assets change before completion of the deal.

“If you haven’t got a fixed price, you can’t fund the buyout transaction and that is particularly so in today’s banking environment where funding is very difficult,” said Mark Bower, finance director at Arnold Laver and Co.

Getting 50% ETV uptake

The scheme achieved the fixed price by undergoing a series of liability-hedging exercises, before offering members ETVs to leave the scheme.

If that figure had been significantly bigger it would have put the whole funding of the buyout into question

These measures enabled Arnold Laver to remove the risk of significant market changes, and therefore get some price security with the provider, Pension Insurance Corporation.

This led to the difference between the indicative and the final price being just £70,000.

“If that figure had been significantly bigger it would have put the whole funding of the buyout into question,” said Bower, in a report on derisking for Clear Path Analysis.

“That could have actually scuppered the whole deal and all the costs that go with that.”

The scheme had begun reducing its risks in 2007 through buying swaps and hedging against inflation and interest rate movements.

It then undertook an ETV exercise, to which it achieved a 50% take-up rate.

“We knew we were in a fortunate position with our matching, making funding near to buyout. So the transfer values we could offer our members were very high,” Bower said.

There were certain members who were better off taking the ETV than staying in the scheme, such as people who wanted a pension for themselves but not their spouse.

Other steps for successful buyout

Bower advised other schemes weighing up a buyout to make sure the sponsor and trustees work very closely and are able to trust each other.

Having the right team in place before we started that final push was a tough decision, but the right one to make

He also said schemes need to be able to plan as far in advance as possible, while also being able to make snap decisions if conditions change.

“It means the pension scheme has to get used to making decisions quickly and not in three months’ time when they next have their trustee meeting,” Bower said. “You can miss opportunities.”

Getting the right team of advisers, lawyers and actuaries was also key to Arnold Laver’s deal, Bower claimed.

When the scheme first looked at going through with the deal, the company wanted all the consultants to have experience of dealing with buyouts.

But Bower was surprised not many had worked on similar transactions before.

The company and the trustees decided to bring in a specialist actuary with buyout experience and make sure the investment manager was also experienced.

“It meant as issues cropped up, they knew these were solvable as opposed to deal breakers,” he added.

“Having the right team in place before we started that final push was a tough decision, but the right one to make.”