(January 22, 2013) — Goldman Sachs’ UK insurance arm Rothesay Life will insure £115 million (US$ 182 million) of a food distributer’s retirement obligations, pushing Rothesay to the top of bulk pension annuity providers in the UK.
In December, the insurer took over £680 million of liabilities from the Merchant Navy Officers Pension Fund, which was the UK’s largest bulk annuity transaction in 2012. This sale represents a large chunk of the £1 billion in new group annuities Rothesay said it issued last year. Still, the four-year old firm reports a “strong pipeline of credible transaction opportunities for 2013.”
Rothesay’s CEO Addy Loudiadis said in a statement that the Vestey risk transfer “illustrates the trend for defined benefit pension schemes to use their gilts to purchase bulk annuities. For such pension schemes,” she continued, “bulk annuity pricing remains attractive in relative terms because they have been less susceptible to the fall in interest rates than those schemes with a lower allocation to gilts. We are talking to a number of pension schemes about their intentions to follow this trend in 2013.”
The Vestey Group, a food distributor, will retain an undisclosed portion of its liabilities for the pension scheme’s roughly 14,000 members.
This deal marks Rothesay’s first transaction of the year. One of the firm’s biggest competitors, the London-based Pension Insurance Corporation, also announced an annuity deal on the same day. It has agreed to insure a further £30 million of metal engineering firm Vesuvius’ pension liabilities, on top of the £320 million buy-in announced in July.
Even with these large transactions, and more active recent history in the sector, the UK market for pension risk transfer has been dwarfed by multi-billion dollar transactions in the United States. Prudential—the leader in US arena and winner of aiCIO’s Industry Innovation Award for risk transfers two years running—took over some $33.5 billion in pension liabilities last year in two transactions alone, with General Motors and Verizon.
Such deals were the subject of criticism recently in a research paper by NISA Investment Advisors, based in the US. Traditional de-risking strategies are largely—and unfairly—being eclipsed by wholesale annuity purchases, the consultancy argued. By, for example, boosting allocations to fixed income, Managing Director David Eichhorn said a company “can achieve almost all of the benefit of an annuity purchase without giving up the liquidity.” For publically-traded firms like GM and Verizon–although not family-owned Vestey–in-house de-risking may both save capital and impress rating agencies.
“If you’re thinking about annuitization, the closest in-house solution is a 100% fixed income portfolio with investment grade bonds that really mirror your liabilities,” Eichhorn told aiCIO. “We would argue that corporations, particularly those with large pensions relative to market cap, undertaking these sorts of large de-risking actions for their pension funds would be justified in having ratings adjustments.”