Less than halfway through the year and 2014 is already proving to be one for the record books. The first quarter of the year generated over £9 billion in pension scheme de-risking arrangements, already making it the third biggest year to date in this market.

However, the most noteworthy achievement came in March, when Legal & General secured a £3 billion buy-in arrangement with the ICI Pension Fund, the largest ever bulk annuity policy arranged by a pension scheme in the UK.

This milestone policy covers 12,000 of the fund’s pensioner population, which were selected to ensure the optimum balance between risk reduction and economic value for the fund.

According to lead adviser LCP partner Clive Wellsteed, the fund was able to use its scale to negotiate competitive terms, reduce risk and enhance member security.

The transaction was a culmination of a six month competitive tender, during which Legal & General was selected for the strength of its balance sheet and asset transitioning capabilities, according to head of bulk annuities and longevity insurance Tom Ground.

This project was the latest in the ICI Pension Fund’s long-term objective to reduce risk, and this arrangement was described by the ICI Pension Fund chairman of trustees, David Gee, as a “significant step in its strategy to further reduce risk in the fund”, and improving member benefits by “substantially reducing longevity risk for the fund”.

What makes the £3 billion transaction so eye-popping is not only its size, but the fact that it previously wasn’t deemed feasible for schemes to offload this amount of risk onto an insurer in one transaction.

Being a first-of-its-kind transaction, Legal & General understandably had to develop a bespoke arrangement with the fund, which included unique elements such as the transfer of the derivative portfolio backing the liabilities, as opposed to just transferring the fixed income element of the portfolio, which is traditionally the case.

As Ground points out, Legal & General integrated its 27 years’ experience as a market leader in the bulk annuity market with its industry-leading investment management capability in order to complete this arrangement.

However, along with Legal & General’s expertise, the maturity of the market also played a big role in enabling this transaction to come to fruition.

The market has gradually become more experienced with the insurance of liabilities of increasing size, which has in turn reduced the time taken to complete the process. As Ground notes, Legal & General has implemented a number of deals now that cover more than £1 billion of liabilities, meaning its expertise in executing arrangements of this size has grown.

From a pricing perspective, Legal & General has become more sophisticated in the assets it buys to back these policies, relying more heavily on illiquid assets invested in UK infrastructure and housing at a rate of around £100 million per week during the first quarter of 2014.

Meanwhile, this milestone deal is expected to be the catalyst, exploding the bulk annuity market to the reaches of larger-sized schemes.

“We have previously expanded the market by implementing bulk annuities solutions for smaller schemes and now the time is right to further expand the market for larger pension funds, enabling us to offer solutions for the whole of the pension scheme market,” Ground says.

Ground also goes further to say that Legal & General is capable and ready to implement an arrangement exceeding the size of the ICI arrangement.

As Ground explains, the top 100 schemes represent around 70 per cent of the market, and around 50 per cent of these have assets of around £5 billion.

“These schemes have until now either embraced or reluctantly accepted long term self-sufficiency. We have the perfect combination of balance sheet size, risk diversification, expertise, innovation and execution ability to help this area of the market to de-risk,” he says.

For potentially the first time, larger schemes have realised that there is the possibility, and benefit, of implementing a bulk annuity deal within their remit, so many similar deals are expected to follow. This year is well on course to prove the biggest and best yet for the bulk annuity market. Watch this space.

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