British American Tobacco in £3.4 Billion Pension Buy-In Deal

The British American Tobacco UK Pension Fund has concluded a pension insurance buy-in with Pension Insurance Corporation (PIC) to insure £3.4 billion of liabilities. The transaction, which covers 10,600 members, is the third-largest risk transfer deal in the UK to date, and the largest that includes both retired and deferred members. It was also PIC’s largest-ever transaction.

The fund is the fifth FTSE100-sponsored pension plan to complete a transaction this year, along with private equity firm 3i, retailer Marks & Spencer, publisher Pearson, and automaker Rolls-Royce.

The British American Tobacco UK Pension Fund has total liabilities of £4 billion, including a residual section open to ongoing accrual. The trustee was advised by investment consultant Lane Clark & Peacock, which acted as lead transaction adviser and advised the trustee on strategic journey planning and transaction structuring, and negotiated and executed the transaction.

The buy-in deal “achieves a significant step towards the trustee’s objective of reducing risk and increasing the security of members’ benefits,” Brian Barrow, chairman of the British American Tobacco UK Pension Fund, said in a statement. “We are delighted that we have been able to complete a transaction of this scale successfully, despite the recent market volatility.”

The insurance policy acquired by British American Tobacco operates as a UK fund investment asset with the intent of matching a specific part of the UK fund’s future cash flow arising from the accrued pension liabilities of pensioners and deferred pensioner members.

BAT said the buy-in will reduce the fund’s value at risk in relation to key risks associated with improved longevity, inflation, and interest rate movements while improving the security to the fund and its members.

According to PIC, the transaction was particularly complicated because of its coverage of both retirees and current workers.

“Insuring both pensioner and deferred members introduces more complexity to an insurance transaction, when compared to similarly-large pensioner buy-ins,” said Mitul Magudia, PIC’s head of business development, “and requires careful consideration of areas including, residual risks, asset strategy, and reinsurance.”