Philips Secures Second Buy-In in 12 Months

The Philips Pension Fund has secured a second buy-in deal in 12 months, insuring £300 million with Prudential.

It follows the fund’s £484 million buy-in completed in August last year, insured by Rothesay Life.

The latest buy-in covers the liabilities of 1,800 pensioners and was aimed at “managing investment, longevity and other risks”, advisers LCP said in a statement. LCP have advised the Philips Pension Fund on both deals.

“[Philips] is one of the ‘go to’ pension schemes for an insurer looking to transact when they have attractive pricing opportunities available.”—Myles Pink, principal at LCP.Prudential’s Executive Director of UK & Offshore Tulsi Naidu said the insurer was actively seeking pension funds “opting for large annuity buy-ins as their de-risking route of choice”.

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Myles Pink, principal at LCP, said the fact that the Philips pension was able to act quickly to secure the transaction meant “it is one of the ‘go to’ pension schemes for an insurer looking to transact when they have attractive pricing opportunities available”.

The transaction is the latest in a series of de-risking deals struck this year, by far the largest of which was BT’s £16 billion longevity swap transaction with Prudential Insurance Company of America. Total’s UK pension scheme secured the second-largest buy-in recorded in the UK, insuring £1.6 billion with Pension Insurance Corporation last month. This year has also seen the UK’s largest deal, with Legal & General and Prudential sharing the £3.6 billion buyout of chemical company AkzoNobel’s ICI Pension Fund.

Emma Watkins, partner at LCP, told Chief Investment Officer that schemes engaging in multiple buy-in deals sometimes choose to re-tender for different tranches to take advantage of cost benefits.

“Clearly where the new liabilities or membership tranche is larger there may be a genuine cost benefit to running a competitive tender process,” she said.

“In this case the trustees and adviser would run a full process and it is quite possible that an insurer other than the incumbent will provide a more competitive price—perhaps they can offer more competitive terms for the new demographic of this population, or have just secured a risk-adjusted high yielding asset. However, it is likely that there will be a cost associated with negotiating new commercial terms with a new provider, which will likely set the margin needed for the ‘winning’ insurer.”

Watkins added that the trustees may also have sought diversification of covenant risk, or to ensure competition for future de-risking deals.

The California Public Employees’ Retirement System’s (CalPERS) interim CIO has lauded its performance for the recent fiscal year in public equities (24.8%), private equity (20%), and even fixed income (8.3%). All together, CalPERS’ assets returned 18.4% in 2013-14.

One asset class notably did not get a shout-out from Ted Eliopoulos in his discussion of the results: hedge funds, or—as CalPERS refers to the bucket—absolute return strategies.

The $4 billion allocation made up only a small portion of CalPERS’ $302 billion portfolio, but that slice may get even smaller.

Citing an unnamed source, the Wall Street Journal reported July 23 that the pension fund planned to cut hedge fund allocation by 40%, to $3 billion. Given CalPERS’ July 23 valuation of its hedge fund portfolio, a 40% cut would in fact leave a $2.4 billion bucket.

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CalPERS spokesperson Joe DeAnda also disputed that a decision had been reached about its hedge fund program, but confirmed to CIO that changes may be afoot: “The program is under review and has been discussed by the board several times in open session. No decisions have been made about the program at this time. During the review, the ARS portfolio may change in size and structure but conclusion of the review, and formal decisions about the program, likely will not occur until end of Q3 2014 at the earliest.”

In the fiscal year ending June 30, CalPERS’ hedge fund portfolio returned 7.1%, according to preliminary results, which was the weakest of any asset class except cash.

Eliopoulos, who has led the US’ largest public pension fund during its CIO search remarked that the last year had been “so far, so good.” He noted that CalPERS had posted double-digit returns for four out of the last five years, but cautioned that 2013-14 was “unusual” on two counts.

“One: This sheer magnitude”—25%—“of the public equity performance… That’s a big number. And that’s unusual,” he said.

Secondly, “What you’d expect in a year like that when our equity portfolio is doing so well is that the other asset classes—and in particular, fixed income—would have a less robust or even a negative return,” Eliopoulos explained. CalPERS’ fixed income program in fact beat its hedge fund investments and returned 8%.

“Having all of the major asset classes return positive numbers is somewhat unusual.”