The trustee of the Lloyd’s Superannuation Fund (LSF) has undertaken a pension insurance buyout with Pension Insurance Corporation (PIC) covering £40m of liabilities.
The deal saw the trustee agree an innovative fixed premium mechanism with PIC, which enabled the scheme to fix the price of the bulk annuity contract and avoid picking up the bill for movements in the annuity price after its employer triggered a section 75 (s75) debt.
The LSF, established in 1929, is a multi-employer defined benefit pension scheme whose members are employees and former employees of some of the companies, past and present, associated with the Lloyd’s of London insurance market.
The second largest participating employer recently exited the LSF triggering an s75 debt on that employer. The trustee decided to use part of the debt proceeds to secure the £40m bulk annuity contract to insure the parented liabilities of the exiting employer.
Normally under s75, when an employer departs from a scheme it becomes liable to pay its share of the scheme’s liabilities and the debt crystallises on the date that the employer exit takes effect, and legislation does not allow adjustment for subsequent market movements. This would mean as a ‘last man standing’ scheme any shortfall between the s 75 premium and the buyout price would have to be met from the remaining scheme assets.
However, adviser Barnett Waddingham sought from PIC a method of fixing the bulk annuity contract premium at the crystallisation date, with the fixed premium period providing sufficient time for the s75 debt methodology to be agreed between the LSF trustee and the exiting employer.
Barnett Waddingham and PIC said as far as they were aware, this type of fixed premium mechanism has not been previously used.
LSF trustee chairman Eric Stobart said: “Once the exiting employer agreed to work with the trustee on this, we were pleased that the hard work and innovative approaches of Barnett Waddingham and Pension Insurance Corporation meant we were able to agree a fixed premium mechanism within the short timescale available. The trustee was surprised that such a mechanism had not been used before, and expects that other schemes may wish to consider this in future.”
Barnett Waddingham partner Danny Wilding added: “We were delighted to be able to come up with a new solution to an old problem that helped our client, and the other parties involved, to achieve a successful outcome in this case by hedging risk in volatile market conditions. An important element was Pension Insurance Corporation’s ability to implement an investment portfolio which turned our idea into a practical reality.”
PIC senior actuary Matt Barnes said: “Pension Insurance Corporation is committed to innovation in the bulk annuity market and we were pleased to have this opportunity to work with the LSF trustee and BW to tailor a solution to meet the specific requirements of this unusual transaction.”
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