ICI Splits $1.2B Buy-In with Two Insurers

The UK chemical firm has now completed 11 transactions in three years using its innovative “umbrella” contracts.

UK manufacturing giant ICI has obtained a further two buy-ins for its pension fund, securing £980 million ($1.2 billion) of benefits.

Legal & General took on £390 million, while Scottish Widows—which has been active in the UK market for less than a year—insured £590 million.

The ICI Pension Fund has completed buy-ins worth £2.5 billion this year alone, reported consultant LCP, which advised on the deal. This brings its total transactions to 11, covering 75% of liabilities, since it began an innovative process of de-risking in 2013.

Clive Wellsteed, partner at LCP, said ICI had saved “well over £100 million over the past two years” through its standardized contracts and panel of insurers.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

“With a knowledgeable and proactive trustee board, well-rehearsed processes, and umbrella contracts with insurers already in place, we have been able to achieve considerable savings in insurer pricing,” Wellsteed said.

Heath Mottram, CEO of the ICI Pension Fund, said his fund’s method could become “a blueprint for how larger schemes will insure their liabilities at scale through buy-ins in the future.”

Mottram and his team have divided the fund into tranches, with each one insured separately when the trustees are able to secure the best price. Most notably, the fund insured £750 million with Legal & General eight working days after the UK’s referendum on European Union membership, saving £10 million on the price due to favorable market movements.

“We have seen an increase in insurer appetite and activity since the EU referendum in June,” Wellsteed added. “For schemes that are holding bonds or gilts or have hedged interest rates, there are compelling opportunities to de-risk at attractive levels through buy-ins and this is generating significant interest from schemes we are speaking to.”

Related:Brexit Boosts £230M Buy-In & Philips Seals UK’s Biggest Ever Full Buyout

IMF: Low Rates Threaten Solvency of Pensions, Insurers

The longer interest rates stay low, the more difficult it will be for pension funds and life insurance companies to meet liabilities.

Pension funds and insurers may become insolvent if interest rates continue at current lows, the International Monetary Fund (IMF) has warned.

In its latest global financial stability report, the IMF discussed the challenges facing pension funds and life insurance companies given the current low-rate environment.

“Sustained low interest rates are eroding the viability of business models for many life insurance companies and pension funds, threatening solvency over the medium term,” the report stated.

For pension funds in most countries, low interest rates mean higher liabilities, as lower discount rates increase the present value of future obligations. Many pensions already face funding gaps, and these have been “exacerbated” by low rates, the IMF said.

For more stories like this, sign up for the CIO Alert daily newsletter.

“Defined benefit pensions of US and European companies have seen their funding gaps worsen since the onset of the crisis,” the IMF said. “This reflects a combination of low asset returns (especially on safe assets, such as sovereign bonds) and falling interest rates.”

Furthermore, the IMF said that the shift toward liability-driven investing strategies, which rely on fixed income products, will contribute to declining yields on those assets. This will in turn reinforce funding gaps and generate additional demand for bonds in a “potentially negative spiral,” the report warned.

A period of prolonged low rates could also have disastrous effects on insurance companies. In the US and the UK, the IMF said low rates are “straining their ability to control longevity risk because of the higher cost of hedging.”

Meanwhile, insurance companies in Germany and Japan, which often offer guaranteed returns, are at risk of “an eroded asset-liability management gap as policies continue to pay out a return higher than current rates.”

To address these risks, the IMF said the International Association of Insurance Supervisors should “act promptly to ensure the ongoing strength of insurance company balance sheets.” In particular, the IMF highlighted a need for “high and robust standards” on insurance capital—but warned that chances for consensus on an international standard have been threatened by Brexit and the disinclination of the US Federal Reserve to adopt such a standard.

As for pension funds, the report suggested stronger regulations in Europe to ensure a common framework for risk assessment and enhanced transparency, including valuing assets and liabilities on a market-consistent basis to facilitate standardized reporting and analysis. However, similar proposals have proven unpopular with European funds.

Related: Russell: Pensions Still Reeling from 2008 & Did Britain Just Bankrupt Dutch Pensions?

«