UK - The Merchant Navy Officers Pension Fund has completed a £500m (€548m)  buy-in with insurer Lucida, covering the pension liabilities of 22,000 retired members.

In the scheme trustees' annual report for 2009, it noted that as part of a strategic review the Trustee had been investigating the possibility of securing benefits from the Old Section of the scheme, which closed in 1978, with an insurer.

But it added: "Whilst securing members' benefits in this way remains the Trustee's longer-term objective, economic circumstances and the fall in investment values have meant that progress towards this goal will inevitably take longer than originally anticipated."

The MNOPF has now secured a buy-in agreement with Lucida to cover the 22,000 pensioners in the 'Old Section' of the scheme, which has assets of around £1.1bn, that will result in the insurance policy becoming a new asset class within the pension fund.

Andrew Waring, chief executive of MNOPF, said: "The strong recovery in asset values, particularly equities and credit, since March 2009 has significantly improved the funding position of the Old Section. MNOPF with Watson Wyatt as delegated CIO has monitored the affordability of annuities as measured against the value of its assets so it could transact when the time was right. The fund was prepared and ready to take opportunities to secure liabilities and has done so."

This is the first new deal by Lucida in the bulk annuity market in 2009, following an earlier buy-in deal with Morgan Crucible last year, a reinsurance agreement with New Ireland and a longevity swap with JP Morgan.

The firm noted it has had ongoing business from existing clients that has resulted in around £30m in additional new business this year, although it admitted 2009 has been a "relatively slow year for the de-risking market while pension funds have been evaluating the fallout from the credit crisis".

Lucida confirmed its majority shareholder, Cerberus, had agreed to inject £80m in new capital to support the deal. But it pointed out: "Insuring pensions schemes is a capital intensive business as insurers are required to hold a prudent level of capital against all the risks inherent in the business they write. Lucida draws down this capital from Cerberus on a deal-by-deal basis".

The buy-in with Lucida will cover a majority of the liabilities in respect of existing pensioners in the Old Section. However, Waring confirmed the MNOPF will "look at further opportunities for de-risking liabilities in the Old Section and is keeping the investment strategy of the New Section under review".

Paul Kitson, project lead and senior consultant at Watson Wyatt - the firm currently acting as MNOPF's delegated CIO - said: "Annuities and similar solutions are the ultimate matching asset for pension schemes and protect them from market movements and increasing life expectancy."

He added that multi-billion pension funds like MNOPF, valued at £2.66bn for both scheme sections at 31 March 2009, "are looking to de-risk in stages but be ready to move quickly and take advantage of opportunities such as this as they arise".

The MNOPF appointed KPMG in June to conduct a review of its delegated CIO arrangements, currently run by Watson Wyatt. Waring confirmed the process is ongoing and will "run through well into 2010". (See earlier IPE article: Merchant Navy asks KPMG to review 'delegated CIO')

"Watson Wyatt, as MNOPF's delegated CIO, have been instrumental in the pensioner buy-in transaction, ensuring the Trustee was prepared and ready to take action when suitable buy-in terms were presented. The fund has traded supranational and credit holdings for an insurance policy on a very similar yield but with the added benefit of longevity protection and enhanced security," he added.

Elsewhere, Paternoster, another firm in the bulk annuity market, has announced a restructuring of the firm as it has agreed a further £5m capital investment by its shareholders.

Paternoster said the additional £5m will "ensure the company retains the capability to write new business once it has raised further money or when there is significant improvement in the economic outlook".

It also suggested the new capital will help the group "assist in the rapid growth of the longevity-only risk transfer market". But while it predicted greater demands for buyouts and de-risking solutions in the future it admitted the need to cut back on staff.

Paternoster said while the volume of transactions "will continue to be subdued for some time and Paternoster focuses on raising more capital" the workforce is to be reduced from 130 to 106. In addition, Mark Wood, previously chief executive of the firm, will take on the role of deputy chairman and Ed Jervis will replace him from his current role as commercial director.

At the end of August, Paternoster had responsibility for the benefits of 38,000 pensioners and 7,500 deferred members of 42 schemes, and currently it pays out around £13m in pension payments each month.

Jervis said: "As the risk of credit defaults diminishes and asset values improve at the same time as underlying corporate cash flows strengthen, so pension scheme buyouts will again become viable and demand must be expected to soar. These conditions will also be conducive to raising further capital."

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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