Insurers deliver flexible derisking payment plans

Schemes such as Arnold Lever and the London Stock Exchange have already taken advantage of such plans, which are now being offered more widely.

Insurers have developed a number of payment options for larger schemes with liquidity issues, and these have been opened up to the wider market to make deals more affordable for their unfunded counterparts.

The buyout and buy-in market is expected to get more expensive in the next couple of years, once European Solvency II legislation is introduced, requiring insurers to hold more capital reserves.

But schemes wishing to take advantage of the current favourable pricing in the market have been urged to seek indicative quotes to ensure they know the approximate costs of derisking.

Their management teams should weigh up the various payment plans to see which best suit their circumstances, taking into account the additional costs brought with the flexibility.

“While the affordability is probably as good as it’s ever been, you’ve still got to have a decently-funded scheme in order to fund the deal,” said Tiziana Perrella, head of buyout services at JLT Pension Capital Strategies.

“I would say that’s fundamentally important.”

Payment options

The main types of payment plans available to schemes are:

• Partly-deferred payment – this option, used by the Arnold Lever Pension Scheme in last year’s buyout deal with Pension Insurance Corporation (PIC), sees the insurance contract put in place on day one, with the scheme only paying a proportion of the premium at the outset.

The rest is paid in fixed payments over a period of time, similar to a recovery plan. It is as if the insurer has made a loan to the pension scheme, which is gradually paid off with a commercial rate of interest.

The plan is suitable to schemes which want to take advantage of the current pricing in the derisking market, but are unable to release all their capital at the beginning of the contract, perhaps due to holding illiquid assets such as property and hedge funds.

Schemes can match the payments to the insurer with the sponsor’s schedule of contributions to the scheme.

But the main drawback is the insurer must take on the appropriate capital reserves for the full liabilities from day one, and any mismatch in cost will be factored into the premium payments later paid by the scheme.

• Deferred insurance – this option was developed in response to this problem.

It is similar to a deferred premium, but here the scheme holds the liabilities to be insured for a period to reduce the difference between the full premium and the amount that can be afforded at the current time.

This option has been offered by MetLife Assurance and Aviva.

• Tranched – this option, as used in the London Stock Exchange Retirement Plan’s £200m deal with PIC in May, is a mixture of the two previous plans.

Here liabilities are passed over to the insurer and paid for in tranches over a set period of time on partly guaranteed terms.

“The key point to consider is the extent to which you guarantee the pricing or not – and how much of a guarantee do you want?” said David Collinson, co-head of business origination at PIC.

“Do you want a full guarantee on pricing or do you just want a partial guarantee and have some floating element?”

Market timing

For the past six months, derisking as been at its most attractively priced since 2008 due to favourable gilt and swap markets and improved scheme funding positions.

Schemes which are considering transacting and are able to, have been urged to take advantage of the current market.

“I have sat with plenty of trustees where they have just regretted not buying in the past,” said Perrella. “For me, the key reason transactions don’t go through is poor governance. The trustees don’t move fast enough and terms move against them.”

Collinson said schemes should not be concerned about missing out on future cheaper pricing if they transact now, adding: “Regret risk shouldn’t be top of the agenda.

“You shouldn’t not buy something on the off chance it might get cheaper in the future. If you’re happy with the price today and happy with the result – i.e. removing risk – you should go ahead.”

He compared delaying transacting in anticipation of a cheaper deal to wanting to buy a high-tech television, but waiting until the prices were reduced.

“You never actually end up buying the telly if you do that because you’re always worried about the potential for the price reducing or something new coming in,” he said.