Behind the scenes of Northern Bank Pension Scheme’s £680m buy-in

What happened?

The trustees of the Northern Bank Pension Scheme have completed a £680m buy-in deal with Prudential.

The insurance transaction is the largest buy-in or buy-out deal announced so far in 2015. It will cover most of the scheme’s current pensioner and dependant members.

The trustees were able to enter into the buy-in after an improvement in the scheme’s funding position. In a letter to members of the pension scheme, the chairman of the pension scheme said: “Having received detailed professional advice, the Trustee agreed (whilst still retaining a strong funding surplus) that the purchase of the buy-in policy was both an appropriate and a timely use of some of the current surplus.”

What does it mean for trustees?

It’s encouraging that trustee boards are reaching funding levels where they are in a position to negotiate a buy-in deal with an insurer.

Schemes are taking sensible and logical steps towards removing risk from their balance sheet, says Michelle Wright, a partner at consultancy firm LCP, which advised on Northern Bank’s buy-in.

Wright says: “In general, what we’re finding is that lots of schemes have taken good steps to hedge their other risks – they may have taken down their return-seeking asset risk by moving out of equities, for example, and hedged their inflation and interest rate risks through LDI [liability-driven investment].

“They are finding that the key unaddressed risk for them is longevity and at that point it often makes sense for them to do a buy-in or a longevity swap.”

What’s next?

In the past, a buy-in was often seen as the first step on the road to a full buyout of the scheme’s assets.

These days, a more gradual approach is popular, says Wright. “What we are also seeing schemes increasingly look at is a series of staged buy-ins.”

Staging a series of buy-ins is popular for schemes which are finding that a buy-in of all their pensioner liabilities is unaffordable, says Wright. They are also proving popular among schemes which may need to use their assets to support their LDI strategy.

Northern Bank’s pension scheme is keeping an open mind about whether it will purchase additional buy-in policies. The trustees’ statement to members reads: “The terms of the policy provide some flexibility to extend the buy-in, however the scope to do so is limited. Accordingly, further buy-in investments may be considered as part of the Trustee’s strategy to reduce risk over time and further increase benefit security.

“The Trustee will take such steps if it believes it is in members’ interests to do so based on professional advice and taking account of market conditions and insurance pricing at the time.”

What is a buy-in?

A buy-in is a bulk annuity policy covering a selected portion of the scheme membership – most commonly pensioners.

Not all of the scheme’s risk is passed over; the scheme has to decide which member risks will be passed on and which will be retained.

A buy-in takes the form of insurance policy cover for a segment of a scheme’s members – in effect, that means pensioners.

Unlike a full buy-out, this strategy is an investment decision as the policy acts like a scheme asset.

Read more about buy-ins and buyouts here, or check out “related articles” on the top right hand side of the page.