End of year flurry of activity for bulk annuity sector

The bulk annuity market lurched back into life in the final month of 2008 when the trustee of the Thorn Pension Fund completed a landmark £1 billion contract with Pension Insurance Corporation (PIC).

The Thorn deal is the largest UK pension buy-out to date and was followed by a £150m deal between Dairy Crest and Legal & General.

The Thorn/PIC deal secures the full benefits for over 15,000 of their fund members. In addition, members will receive an uplift to their existing benefits once the accompanying wind-up of the fund is complete.

The transaction was arranged by Mercer as independent broker and actuarial and risk adviser to the trustee. Mercer says a competitive tender was arranged for a buy-in of the benefits involving a number of leading insurers with price, security, speed of transaction and execution ability as the trustee’s key selection criteria.

Kevin McLaughlin, risk management adviser to the trustee and a principal at Mercer says: “Through this buy-out members have obtained additional benefit security and, in due course, will receive an uplift to their existing benefits. It’s a good deal for them. The impact for the Trustee is to remove considerable future investment and mortality uncertainty from the fund.”

KPMG, Aon, Mercer and Clifford Chance all advised on the £150m buyin deal in which Legal & General bought out around half of the pensions in payment liabilities of Dairy Crest Group. The Fund will continue to pay pensions and members will not be impacted directly as the policy is an investment of the fund.

The policy covers around half of the Fund’s liability for pensions in payment, and provides flexibility for Dairy Crest and the Trustee to explore further similar arrangements in the future. As at 30 September 2008, the Fund had total liabilities of £658 million on an IAS19 basis.

KPMG pensions partner Ben McDonald, who led the advice, says: “We are pleased that a commercial deal could be struck that meets the long term objectives of both the company and trustee, despite the turbulent times currently prevailing within financial markets. This transaction was slightly different to many others – insuring only part of the pensioner liabilities and being completed only a few weeks after receiving a suitable insurance quotation.”