M&G launches ‘risk-sharing’ buy-in service for pension schemes

The £500m deal involves the pension scheme’s members being insured as with a traditional buy-in, but allows the corporate sponsor to “participate in the risk and reward generated” through insuring a well-funded scheme, according to M&G.

It is the first transaction completed using M&G’s new “value share” bulk annuity service. This involved the use of a captive reinsurance entity domiciled in Guernsey and owned by the corporate, with M&G's wholly owned insurance subsidiary, The Prudential Assurance Company, then insuring the pension scheme.

The structure allows the sponsor to share the financial risks and upsides connected with the buy-in transaction, including the ability to withdraw any excess from the captive reinsurer once a year.

Max Koe, associate director in M&G's Corporate Risk Solutions team, told Pensions Expert that, from the trustees' perspective, the deal was no different to a traditional buy-in as members' pension benefits are secured in exactly the same way.

However, the corporate sponsor can access some of the potential investment returns of the assets backing the buy-in through the captive reinsurer structure. This includes long-term assets that align with the government's productive finance objectives, Koe explained, including social housing, infrastructure and private debt.

Alison Fleming, partner at PwC, which was lead adviser on the buy-in, said: “Implementation of this ‘first of its kind’ structure is the culmination of our work with the sponsor on pensions over a number of years.

“The solution we have achieved ultimately enables the trustee to achieve their derisking objectives and secure members’ benefits, while enabling the sponsor to access risks and rewards that would be passed to an insurer in a more traditional transaction.”

M&G’s ambitious bulk annuity plans

M&G re-entered the bulk annuity market last year and has so far written approximately £1.4bn of new business, including deals for one of its own defined benefit pension schemes and for schemes sponsored by Northern Bank and NSK.

The company has also hired Kerrigan Procter from Legal & General as managing director of its corporate risk solutions business.

M&G said Procter will join in January to lead the company’s “ambitious growth strategy in the UK pensions de-risking market”. It aims to write “significant volumes” of new business through its value sharing proposition over the next few years.

Clive Bolton, life insurance CEO at M&G, said: “This significant de-risking milestone has been made possible thanks to the strong alignment of interests, collaboration and commitment between all parties involved.

“By completing the first ever bulk annuity transaction that shares value with the sponsor, we are showcasing our ability to create innovative solutions that address our clients’ requirements.

“This has the potential to transform the market by providing an alternative option for sponsors of large UK pension schemes to consider as part of their de-risking endgame.”

Iain Pearce, head of alternative risk transfer at Hymans Robertson, said M&G’s new proposition could appeal to pension schemes and employers that are grappling with how to handle funding surpluses.

“With many schemes considering their preferred endgame, weighing up the merits of maintaining access to an anticipated emerging surplus against the risks associated with not settling, there will be many cases where trustees and sponsors have different views,” Pearce said.

“The provider market has been working hard to allow stakeholders to achieve their objectives and it’s great to see M&G complete their first transaction under this value share offering...

“For the sponsor, in exchange for financial support, they have access to the anticipated emerging surplus from the pension scheme while still providing a high degree of comfort for the pension scheme.”