Mega Buyouts Land in the UK | Chief Investment Officer

(March 26, 2014) — The UK’s largest pension buyout has been transacted by a fund using two insurers to complete the deal.

Chemical company AkzoNobel has insured its ICI Pension Fund members’ benefits—in a scheme acquired when the firm took over rival ICI in 2008—in a deal worth £3.6 billion, all partners announced today.

The fund was one of the first, and certainly the largest, to use two insurers to take on its pension liabilities: Legal & General and Prudential.

“The insurers have sought to reinsure the majority of the longevity risk immediately,” said Ian Aley, senior consultant at Towers Watson, who advised AkzoNobel on the deal. “This two-stage process is routinely used in the longevity swap market, however to date the insurers in the bulk annuity market have generally held the risk for a period of time before reinsuring.”

So far this year, deals in the UK have made 2014 the third largest on record already, Towers Watson said. This one deal makes up almost half of last year’s record £7.6 billion transacted over the 12 months. It is double the size of the previous largest deal—a £1.5 billion transaction between music group EMI and Pension Insurance Corporation.

The longevity hedging market has also received a boost this year, through a £5 billion transaction by the UK staff pension fund of insurer Aviva, announced earlier this month.

Due to their close working relationship with insurers, Towers Watson revealed there would be more deals of this size in 2014.

“The expected surge in transaction sizes is driven by both supply and demand factors,” said Sadie Hayes, transaction specialist at the firm. “The majority of the longevity risk from these large transactions, whether they are bulk annuities or longevity swaps, will ultimately end up being reinsured. The longevity reinsurance market is currently very competitive, with an ever-increasing number of players and the growing size of transactions that the reinsurers will consider as they become more confident with UK longevity risk. This, combined with a significant improvement in solvency levels among most schemes in the last 12 months, is providing even the largest pension schemes a credible option to materially reduce risk.”

Although on a slightly smaller scale, mega buyouts have also landed in Canada. This month, an unidentified Canadian company purchased $500 million of annuities from an insurer, Towers Watson confirmed, which ranked as the largest pension risk transfer.

The record for the largest deal to date remains with US automotive company GM, which offloaded $26 billion in pension liabilities to Prudential in 2012.