Innovative buy-out

Published by Gavin Markham, Nick Griggs, Andrew Vaughan on

We carried out an innovative buy-out for part of the Lloyd’s Superannuation Fund (LSF), a £500m multi-employer defined benefit scheme associated with the Lloyd’s of London insurance market.

The second largest participating employer exited the LSF triggering a 'section 75' debt on that employer.  The LSF Trustee decided to use part of the debt proceeds to secure a £40m bulk annuity contract with Pension Insurance Corporation to insure the parented liabilities of the exiting employer.  The LSF Trustee wanted as much certainty as possible around the insurance cost.

Barnett Waddingham sought from insurers an innovative mechanism to fix the premium for the bulk annuity contract at the crystallisation date of the section 75 debt, with the fixed price period providing sufficient time for the section 75 debt to be determined and paid.

We advised the scheme on the selection of a bulk annuity insurer and the most appropriate transaction structure using a swaption to protect against any adverse price movements.

Barnett Waddingham Pension Scheme Buy-out Innovation

This graph demonstrates the volatility of the market in the period leading up to the transaction and how the fixed premium option was able to remove the Trustee’s exposure to this volatility during the calculation and payment period.

"The LSF Trustee had clear objectives for this exercise, particularly around minimising risk. 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"
Eric Stobart, Chairman Lloyd’s Superannuation Fund