Insurer RSA has agreed to offload £6.5bn worth of pension liabilities to Pension Insurance Corporation, marking the biggest transaction of this kind in the UK as a sharp move higher in market interest rates paves the way for more deals.
The sector endured a turbulent autumn as liability-driven investment strategies employed by many pension funds spectacularly blew up, triggering a crisis in the gilts market. But the lasting step-up in interest rates has had the effect of shrinking those funds’ liabilities, leaving them with better funding levels.
That has meant more companies are able to secure a bulk annuity deal, where they pay a premium to an insurer to take over all or some of their pension liabilities.
Trustees at two pension schemes belonging to RSA, now a unit of Canada’s Intact, have agreed so-called “buy-ins” with PIC that cover the pension payments of 40,000 members, it was announced on Monday.
“The crisis in September . . . it hasn’t paused this market, it has accelerated this market,” said PIC chief executive Tracy Blackwell.
Schemes are finding themselves suddenly in a much better funding position, she said, while finance directors are more keen than ever to shift pensions risk off their balance sheet. RSA began talking to PIC before the crisis last year, Blackwell added.
Intact’s chief financial officer Louis Marcotte said it was an “excellent opportunity to remove UK pension exposure” from the group’s balance sheet in a statement announcing the deal.
It will make an upfront contribution of £500mn across the two pension schemes to enable the transaction, which will release about £150mn of group capital, Intact said.
Charlie Finch, partner at consultancy LCP, which advised Intact, said it was set to be a “big year” for such de-risking deals because of marked improvements in schemes’ funding levels.
Insurers, he said, are now “much more confident and willing to write the really big transactions” after developing their in-house investment teams. Insurers will typically take over the gilts backing a corporate pension scheme and swap them for other fixed-income investments that can make a better return.
The bulk-annuity market is a key growth area for UK insurers. Analysts at JPMorgan have estimated that around £600bn of the £2tn in UK defined pension scheme liabilities could transfer to insurers in the next decade.
The Bank of England’s Prudential Regulation Authority has promised a review of whether the sector’s risk management is “keeping pace” with the increase in bulk purchase annuity deals.
The regulator issued a warning last month that a high-profile reform of insurance solvency rules “increases risk” for policyholders. Blackwell said she had not heard any disquiet from trustees considering bulk annuity-deals after the PRA’s warning. “I don’t think that [Solvency II overhaul] does result in a weakened insurance industry,” she added.
