UK - The first £1bn (€1.25bn) bulk annuity deal has been completed as the trustees of the Cable & Wireless Superannuation Fund have agreed to "buy-in" an insurance policy for its current pensioner liabilities with Prudential.
The £2bn pension scheme reported an IAS19 surplus of £375m in May and said it had contributed £19m to make the UK scheme "fully-funded on an ongoing basis", but despite the good funding position it said it was continuing to reduce risks in the portfolio.
The scheme confirmed it was in "active discussions" over potential de-risking options including an insurance buyout, stating a full buyout would be unlikely in the current market conditions but a partial buyout would be an option. (See earlier IPE article: C&W looks to partial buyout for de-risking)
Cable & Wireless has now confirmed it has agreed a "buy-in" of the pensioner element of the fund - which means the insurance policy is retained in the portfolio as an investment and trustees are still responsible for payments to members.
The bulk annuity purchased from Prudential for just over £1bn - which the fund will pay for through a combination of assets and cash - will remove all risks relating to the 5,000 pensioners of the scheme as of 1 August 2008, and will reduce the fund's exposure to liabilities by 50%.
In addition, Cable & Wireless confirmed it would contribute an additional £10m into the pension fund, although it warned, "in current market conditions, the cost of a buy-in of the fund's remaining liabilities is unattractive".
Tony Rice, group finance director at Cable & Wireless, said: "The transaction materially reduces the fund's exposure to liabilities by over £1bn. It also materially reduces the fund's and shareholders' exposure to the future risk of adverse changes in actuarial assumptions and investment returns."
Prudential has not been too proactive in the bulk annuity market in recent months following concerns about the pricing of buyout solutions, as a number of new companies entered the market.
But Nick Prettejohn, chief executive of Prudential UK & Europe, said: "This agreement is the largest of its kind in the UK this year and demonstrates our ability to complete complex and innovative transactions within the bulk annuity marketplace."
Lane Clark & Peacock (LCP), who advised the company in the transaction while Allen & Overy supplied legal advice, said the deal was a big vote of confidence in the market, which is "well on track" to meet the target of £10bn of business in 2008, despite recent concerns that increased prices will limit pension fund interest.
Clive Wellsteed, partner at LCP, said: "Looking ahead, the attractive deals are still out there - it's just the insurance companies have finite capacity to complete transactions."
Watson Wyatt, which advised the trustees of the scheme alongside the law firm Lovells, said from the members' point of view the deal is "very much business as usual".
Steven Dicker, senior consultant at Watson Wyatt, said: "There is no question of offloading them - it's about increasing their security and reducing risk. Buying annuities is the safety first approach to making sure that pensions can be paid and this agreement leaves the pension scheme in a particularly secure position."
Have Your Say: John Broome Saunders, actuarial director at BDO Stoy Hayward Investment Management said:
"It is ironic that, in a marketplace that has been stoked up by a clutch of new kids on the block, the biggest deal to date has been done by one of the oldest players in the market."
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
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