As news rolled in on June 24 of the result of the UK’s referendum
on membership of the European Union, in a small office in central London, the
team responsible for the ICI Pension Fund were preparing for action.
As government bond prices soared and investors panicked, an opportunity
had presented itself: the price of the £11 billion ($14.5 billion) pension’s
next buy-in had fallen by £10 million.
Heath Mottram, chief executive of Pensions Secretariat
Services which runs the ICI Pension Fund, and his team sealed a £750 million
buy-in with Legal & General (L&G) on July 5—just eight working days
after the referendum, a record for a deal of this size.
“We needed to move
quickly in case this opportunity closed,” said Clive
Wellsteed, partner at the pension’s advisors LCP.
“There is every chance of further market disruption over the coming months given the political environment.”The ICI pension has
a series of “umbrella contracts” in place with L&G for various tranches of
its liabilities, which Wellsteed said were “specifically designed to facilitate
the fund to take advantage of sudden movements in the markets while maintaining
the strong contractual terms and robust collateral structures already in
aftermath of the UK’s referendum was an “excellent opportunity” for pensions in
the market for de-risking transactions, according to a bulk annuity market
commentary from Aon Hewitt.
need to be actively in the market to seize such opportunities,” Aon Hewitt said.
“A scheme can engage with the market, obtain competitive quotations, select a
preferred insurer, agree terms, and then monitor movements in the insurer's
pricing against an agreed trigger. Subject to appropriate advance planning, the
scheme can then transact very quickly when a trigger point is hit.”
L&G’s pricing of bulk annuities is based on corporate
bond spreads above UK gilts. These have fallen back since the ICI transaction,
but Aon Hewitt said “there is every chance of further market disruption over
the coming months given the political environment.”
The ICI transaction
was the pension’s ninth since March 2014. That initial
deal covered £3.6 billion of liabilities and was split between L&G and fellow
UK insurer Prudential. It remains the largest single buy-in or buyout
completed in the UK, according to LCP. ICI has now insured £7 billion of its
£11 billion of liabilities.
The pension—which provides
for more than 55,000 members of the engineering company’s defined benefit plan—won
Award for its de-risking program at the CIO
European Innovation Awards in London in June.
Pension Insures £5B in ‘Umbrella’ De-risking Deal