Breakthrough Public Sector Pension Buy-In

(April 20, 2012)  —  A pension fund in the United Kingdom has become the first local government institution to insure its liabilities, opening up the public sector to more deals of the kind.

The West Midlands Integrated Transport Authority completed the buy-in of its pensioners’ liabilities with Prudential. At £272 million, it is also the largest transaction of its kind so far this year.

Paul Middleman, Head of Public Sector Consulting, at Mercer, who worked on the deal, said: “Whilst we have seen this in the private sector, this is breaking new ground in the sector in terms of local authority pension fund risk management for a sponsoring employer and ultimately the taxpayer.”

The local government fund is open to new members and further accrual.

Middleman said: “Now one fund has taken the plunge we could see this becoming a viable option for funds when dealing with legacy liabilities as part of the governance around their risk management strategy.”

Earlier this year, Pension Corporation was the first pension insurer in the UK to complete the first solution to buyout pension funds that are still accruing member benefits. Automotive part manufacturing company DENSO insured sections of two of its pension schemes worth a total £200 million.

In March, Jay Shah, co-Head of Business Origination at Pension Insurance Corporation, said: “To allow future accruals, whilst insuring the members’ benefits, may provide a lifeline to other pension funds and a possible way forward for other defined benefit schemes whose sponsors will fund future accruals but wish to remove the funding volatility.”

Pension funds attached to public sector organisations that are either defunct or privatised have previously carried out deals of this kind, but these ground-breaking moves open up new areas to pension fund insurers as transaction volumes continue to build.

Actuaries and consultants, Lane, Clark & Peacock (LCP) said if funding levels were to improve, annual transaction volumes in the UK could hit £25 billion by 2017 in their annual report on the industry. LCP also said that the number of pension fund members could double to one million in the next five years.