Brexit’s First Winners: De-riskers

A £750 million transaction involving the ICI pension indicates that market turmoil post-referendum has opened up attractive pricing for buy-ins and buyouts.

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 place.”

The immediate 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.

“Schemes 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 an Innovation Award for its de-risking program at the CIO European Innovation Awards in London in June.

Related: UK Pension Insures £5B in ‘Umbrella’ De-risking Deal