In May 2019, the Trustee of the British American Tobacco UK Pension Fund completed a buy-in with Pension Insurance Corporation (PIC). At £3.4bn this was the second-largest buy-in ever completed at the time and the first of several “mega” transactions in 2019. LCP acted as lead transaction adviser.
The background
The Fund is a £4bn scheme that is well funded against its long-term objective. Following a period of successful asset de-risking, longevity was identified as the key unhedged risk. The Trustee and sponsor established a working group and LCP was appointed by the working group to lead the transaction.
Our solution
The scale of the transaction required a specialised approach. Ahead of formally approaching the market, LCP arranged meetings between the Trustee and senior management at the insurers in order to maximise engagement and position the Fund at the front of the queue of the large number of transactions in the market in 2019.
LCP worked with the insurers to design suitable price-lock and asset transfer solutions. This was important to ensure the Trustee could lock-in the pricing quickly given the amount of assets being restructured. A key challenge was restructuring certain long-term illiquid assets to accommodate the transaction size. We ensured the client wasn’t a “forced seller” by implementing a solution that
realised the illiquid assets for a premium above the value in the Fund’s accounts.
In addition, terms were agreed for a post-transaction transfer value exercise proposed by the sponsor that provided full value to the Fund without delaying the transaction.
The results
The Trustee insured £3.4bn of pensioner and deferred pensioner liabilities, in line with its long-term objective of reducing risk and increasing the security of member benefits. It was able to secure attractive pricing at scale by being in the front of the queue amongst a number of “mega” transactions.
What can others learn from this?
Recent transactions have shown that buy-ins are an effective de-risking strategy for schemes of all sizes designed in a way that complements the wider funding and investment strategy. Insurer engagement and careful preparation is key – for larger schemes, this is not only data and benefits, but also asset preparation and effective governance and engagement with insurers. This puts you in a great position to capture attractive pricing opportunities from insurers when they arise.
