UK - Pensions buyouts are currently the only way to remove mortality risk but can require a lengthy implementation process affecting a firm's accounting figures along the way, suggests a buyout guide produced by Lane, Clark & Peacock.
Details of the consultancy firm's 2007 buyout guide shows allowing an insurance company to ‘ buy out' the pension fund assets can be beneficial to both the sponsor's funding position and improve the scheme's cash flow and risk positions, the relative newness of this sector means many insurance-led offerings have yet to be tested in practice.
More specifically, the eight-page guide states a buyout "locks in" gains and mortality terms for a set length of time, thereby improving funding positions, as well as removing insured liability risk, which can be particularly helpful to corporate transactions such as mergers and takeovers.
Interestingly, however, pursuing this route can be extremely lengthy - a total of six steps are required in all by the pensions management team to complete any implementation - but companies can find there is "potentially limited recognition from the stock market" for doing so, and may even see "a material impact on the company's accounting figures" because of a way a buyout is structured, as well as on the investment and funding decisions for the remainder of the scheme.
This is perhaps most significant as the performance of a firm's pension funding position is increasingly falling under the spotlight, either when corporate deals are on the table or when deficits have to be plugged by surplus cashflow.
UK publishing house EMAP recently transferred approximately £170m of its pension fund assets to new buyout insurer Paternoster, shifting the Emap Earnings Related Pension Plan (EERPP) and the fund of Emap-owned Scottish Radio Holdings (SRH) off its balance sheet liabilities, as the firm is looking to sell all or part of the company to rival publishers. (See earlier IPE story: EMAP transfers pensions to Paternoster)
LCP does highlight many of the advantages of buyouts within its guide, such as the possibility of profit-sharing arrangements and the ability to maintain in-house administration in the short-term, but acknowledges any company and pension fund which does opt for a pensions buyout will have to spend a significant amount of time working on any deal, as well as perhaps paying "a small premium above the accounting liabilities".
A case study presented by LCP - of a FTSE 250 company whose pension is 85% funded on buyout - reveals the buyout is achieved by using part of a pension fund's fixed income portfolio to pay the insurer's premium - the benefit to the insurer being it has a regular income in return for matching the scheme's pensioner liabilities by paying the pensions payroll each month.
By taking this approach and locking-in the same terms for future payments, by paying annual premiums over five years on fixed mortality premiums, trustees were able to improve the risk to future funding at a total cost of £6m, and maintain the existing equity exposure of the scheme, continued LCP in its example.
If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com
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