Case study: food and drink retirement and death benefit scheme

12 May 2017

Providing member options and buying out at a reasonable cost (a genuine win-win)

BREXIT TIME CONSTRAINTS

A short term opportunity arose for the sponsor and the trustees immediately prior to the Brexit vote, to realise proceeds from a non-pensions transaction and to use those proceeds to try to remove risk in the pension scheme.

The trustees and the sponsor wanted:

  • to protect the scheme’s funding level from the perceived impending market turbulence of the Brexit vote,
  • to provide options to members and
  • to deliver security by buying out the scheme with an insurer.

The timescales before the vote were short and the immediately available funds were limited, meaning that an efficient and stable solution was required.

STABILISING THE FUNDING POSITION

A vital initial step was to stabilise the buyout funding level of the scheme, by implementing a robust investment matching strategy to protect against changes in inflation and interest rate curves. An insurer was selected prior to the Brexit vote so that the scheme’s investments could be aligned closely to that insurer’s daily pricing formula, to protect against volatility, so far as practical.

Pensioners in payment were insured soon after the Brexit vote. The non-pensioners were given the option of an enhanced scheme transfer value, set at a generous level, and with access to financial advice. A key to the stability of the transaction was that the insurer would hold its deferred member pricing throughout the 3 month member option window, meaning that all parties (sponsor, trustees, members and the insurer) could gain confidence that there would be enough funds to enable all members who did not want to take an enhanced transfer value to instead be fully and immediately insured.

THE OUTCOME

The scheme’s finances were protected by the LDI investment strategy from the yield falls surrounding the Brexit vote. The parallel running of the enhanced transfer value exercise and the annuity insurance programme enabled the financial position to remain stable while members selected their desired options, something that would not have been possible with a more lengthy process.

The end result was that it was possible (using the available funds) to give valuable options to members and to provide those who did not want to transfer out with the security of an annuity policy held with a UK insurer (Pension Insurance Corporation). The scheme sponsor was protected from loss by the efficient and stable process.

When the opportunity arose in 2016 to remove our pension scheme risk, we wanted to move quickly. The ability to co-ordinate the investment strategy, provide options for members and purchase annuities, all at the same time, enabled us to achieve the right result for ourselves and our scheme members, at a time of political and economic change in the UK and JLT were able to support us and coordinate all aspects of the deal.– Holly Smedley, Chief Finance Officer, Food and Drink Federation (FDF)