M&G has launched the Value Share Bulk Purchase Annuity (BPA) proposition by completing a £500m (€599m) transaction with a private corporate sponsor and its UK pension scheme, insuring around 3,200 pensioners and deferred members.
M&G’s Value Share BPA proposition is a “first of its kind” alternative to a traditional buy-in, the firm stated, explaining that its structure allows trustees to insure scheme members in exactly the same way as a traditional buy-in transaction, continuing to place members’ security at the heart of the transaction, while also allowing corporate sponsors to participate in the risk and reward generated from insuring their scheme.
Max Koe, associate director of corporate risk solutions at M&G, said the insurer launched the proposition following the mindset shift from corporate sponsors.
He said that while for the last 20 years sponsors looked at defined benefit (DB) schemes as a liability, with funding levels increasing since the 2022 mini-budget under Liz Truss’ premiership, they are now starting to explore the option of run on.
“A lot of sponsors look at their schemes that are overfunded or have a surplus now and think ‘Well, why don’t you run on, maybe stop investing in Gilts, invest in something slightly more attractive, like corporate bonds, and generate a surplus, and then we can share the surplus later down the line’. The issue is the trustee. The trustee’s main job is to secure the benefits for its members – so what’s the incentive for them or for the members?,” Koe asked.
He said that this proposition M&G gives trustees and scheme members “ultimate security” as with BPA a transaction. “And then what we do on the back end, which the trustee doesn’t care about or see, really, is just reinsure some of that risk to the sponsor,” he added.
Koe said this proposition also works for the insurer because by passing some of the risk over to the sponsor, “we don’t have to hold as much capital as we would with a normal core BPA”.
He said: “That means that we can potentially do larger or more transactions in the value share BPA space, alongside doing core BPAs as well. It can be quite attractive from a shareholder perspective in terms of being capital efficient.”
Koe added that M&G has worked on this proposition for a “number of years” and has had “lots of discussions” with different sponsors.
“I think people in pensions and large institutional investors generally are quite scared of being first to do something, so getting a proof-of-concept transaction is really exciting for us, and shows that we can execute one of these transactions,” he added.
Clive Bolton, life insurance chief executive officer at M&G, added that the proposition has the potential to “transform the market” by providing an alternative option for sponsors of large UK pension schemes to consider as part of their de-risking endgame.
The transaction has also been welcomed by the wider pensions industry.
Iain Pearce, head of alternative risk transfer at Hymans Robertson, said that with many schemes considering their preferred endgame, weighing up the merits of maintaining access to an anticipated emerging surplus against the risks associated with not settling, there will be many cases where trustees and sponsors have different views.
He said: “The provider market has been working hard to allow stakeholders to achieve their objectives and it’s great to see M&G complete their first transaction under this value share offering.”
Pearce added that the solution balances the needs of both the members and the sponsor, providing members with the high level of security associated with a traditional buy-in.
“As a number of trustees and sponsors reassess their priorities, we expect these types of solutions to be interesting to many.”
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