Insurer RSA has agreed to dump £6.5bn value of pension liabilities to Pension Insurance coverage Company, marking the most important transaction of this sort within the UK as a pointy transfer greater in market rates of interest paves the way in which for extra offers.
The sector endured a turbulent autumn as liability-driven funding methods employed by many pension funds spectacularly blew up, triggering a disaster within the gilts market. However the lasting step-up in rates of interest has had the impact of shrinking these funds’ liabilities, leaving them with higher funding ranges.
That has meant extra corporations are in a position to safe a bulk annuity deal, the place they pay a premium to an insurer to take over all or a few 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 cowl the pension funds of 40,000 members, it was introduced on Monday.
“The disaster in September . . . it hasn’t paused this market, it has accelerated this market,” mentioned PIC chief government Tracy Blackwell.
Schemes are discovering themselves abruptly in a a lot better funding place, she mentioned, whereas finance administrators are extra eager than ever to shift pensions danger off their stability sheet. RSA started speaking to PIC earlier than the disaster final yr, Blackwell added.
Intact’s chief monetary officer Louis Marcotte mentioned it was an “glorious alternative to take away UK pension publicity” from the group’s stability sheet in a press release saying the deal.
It is going to make an upfront contribution of £500mn throughout the 2 pension schemes to allow the transaction, which is able to launch about £150mn of group capital, Intact mentioned.
Charlie Finch, associate at consultancy LCP, which suggested Intact, mentioned it was set to be a “massive yr” for such de-risking offers due to marked enhancements in schemes’ funding ranges.
Insurers, he mentioned, are actually “way more assured and keen to write down the actually massive transactions” after growing their in-house funding groups. Insurers will sometimes take over the gilts backing a company pension scheme and swap them for different fixed-income investments that may make a greater return.
The majority-annuity market is a key development space for UK insurers. Analysts at JPMorgan have estimated that round £600bn of the £2tn in UK outlined pension scheme liabilities may switch to insurers within the subsequent decade.
The Financial institution of England’s Prudential Regulation Authority has promised a assessment of whether or not the sector’s danger administration is “maintaining tempo” with the rise in bulk buy annuity offers.
The regulator issued a warning final month {that a} high-profile reform of insurance coverage solvency guidelines “will increase danger” for policyholders. Blackwell mentioned she had not heard any disquiet from trustees contemplating bulk annuity-deals after the PRA’s warning. “I don’t suppose that [Solvency II overhaul] does end in a weakened insurance coverage business,” she added.
