Merseyside Pension Fund has completed a £200m buy-in with Aviva, with, we understand, ESG (Environmental, Social, and Governance) considerations playing a significant role in selecting Aviva.
The announcement comes in a record year for buy-ins, with 134 deals completed in the first six months of the year worth a combined £15.3bn, and the market is expected to grow next year to between £40–60bn.
Of course, to date, it's not been common for Local Government Pension Scheme (LGPS) funds to enter into buy-in agreements. The Merseyside deal, which secured the benefits of around 2,500 former Arriva employees, is only the second time a LGPS fund in England has secured member benefits with an insurer.
The first was over a decade ago, in 2012, when the West Midlands Pension Fund completed the first public sector scheme buy-in – a £270m deal with Prudential.
In 2020, Brodies advised on the first and so far only LGPS buy-in in Scotland, when North East Scotland Pension Fund secured the benefits of 1,360 former FirstGroup employees in a £230m deal with Rothesay Life.
Going back to the West Midlands deal in 2012, there was considerable speculation after that transaction that it would open the door to other LGPS funds following a similar path. However, for various reasons, this did not happen.
The gap between our North East Scotland Pension Fund buy-in and the current Merseyside Pension Fund one, is half as long however, and, given we're now seeing a reasonable spread of insurers – Prudential, Rothsay Life and Aviva – entering into this type of transaction, could we finally see an increase in LGPS buy-ins? It will be interesting to see if the Merseyside deal leads to other LGPS funds taking a renewed interest in their buy-in options.
Reminder - The basics of buy-ins
A buy-in is a type of insurance arrangement used by defined benefit pension schemes to secure the future benefits of its members. The scheme acquires a bulk annuity policy from an insurer to secure the future benefits of part of its membership (for instance, just the retired members) or all its members. In either case, the scheme remains responsible for the management of its assets and payment of benefits due to its members. However, in exchange for a fixed price upfront, the insurer backs the payment of those benefits covered under the policy and assumes responsibility for the various financial, longevity and demographic risks associated with those benefits.
Some of the benefits of buy-in:
- De-risking – a buy-in can help reduce uncertainties about the scheme's future liabilities.
- Improved funding – a buy-in can help ensure the scheme has the assets needed to pay benefits.
- Flexible – the scheme can still manage the rest of its assets while de-risking part of its liabilities.
Many schemes that enter into buy-in contracts will do so with a view to swiftly converting the buy-in to a buy-out contract. However, that latter is not currently permissible for LGPS funds.
We'd be delighted to discuss our experience in LGPS fund (or indeed private sector) buy-ins with you – please get in touch with a member of the pensions team or your usual Brodies contact.
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