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What role did residual risk cover play in the transaction?
Peter: Residual risk was a very important part of this transaction for the sponsor and for the trustee. One of their key focuses was to ensure that they chose an insurer that gave them the most cover possible after the buyout occurred, should there be any data, benefit or potential legal issues that might mean benefits are in any way wrong or people are missed.
It did take quite a bit of work to undertake that assessment effectively. We had a “buyer’s report” approach which brought forward a number of the potential legal issues that might be involved in the transaction, so that gave us a head start. Then we brought together data expertise, operational pricing expertise and an intensive due diligence process over the course of six to eight weeks so that we could give the sponsor and the trustee the most amount of cover possible.
What timescales did you work to?
Peter: We worked to quite challenging timescales. The trustee and their advisers engaged PIC and the insurance market approximately 12 months ago, but the majority of the activity was undertaken in the last three to four months once the trustees had selected PIC as their preferred insurer.
Over that period, we had to set up a new arrangement to administer the benefits after the issuance of the deed poll, make sure we were operationally ready for both the buy in and the buy out, undertake due diligence, and work on the policy documents, deed poll and supporting contracts. So quite a lot of resource was required to ensure that those elements could all be reviewed and set up in that time.
Fortunately we had a collaborative approach with both the administrator and the trustee which meant we were able to get to a good outcome.
Residual risk was a very important part of this transaction
This client was particularly focused on member outcomes
What did the deal look like?
Mitul: The scheme is sponsored by Crown Packaging Manufacturing UK, a subsidiary of the New York Stock Exchange-listed Crown Holdings, which provides packaging for numerous food and drink products. Under the buy-in agreed in October, the benefits of all 10,300 pensioner and 2,200 deferred members were passed to PIC before transitioning to buyout exactly one month later.
The deal was aided by a programme of member choices exercises – including an enhanced transfer value process and pension increase exchanges – alongside an investment strategy that gave good returns and equity protection.
Although around £100m of illiquid assets remain within the strategy, the sponsor agreed a structure upfront that allows the company to refund the redemption proceeds when they fall due, which allowed the scheme to afford the buy-in premium and move to buyout.
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With liabilities totalling £2.2bn, the Metal Box Pension Scheme buyout was one of the largest in the bulk annuity market over the last 10 years. The size of the deal, the tight timescales and the client’s focus on member outcomes led to the inclusion of a number of innovative features.
Mitul Magudia and Peter Rennalls, head of business development and head of transition management at Pension Insurance Corporation (PIC), explain why this deal now forms a blueprint for large pension schemes in the UK to immunise themselves from risks on their balance sheets.
INTRODUCTION | Background | Timescales | Residual risk | Wider implications
Residual risk
Timescales
Background
INTRODUCTION
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#01
Three
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With
Mitul Magudia and Peter Rennalls talk about their work on the largest bulk annuity transaction of 2021
Columbia Threadneedle Investments' Sonal Sagar & Michael Hamblett
INTRODUCTION | ASSET CLASS | THE FUND | portfolio snapshot
portfolio snapshot
THE FUND
ASSET CLASS
INTRODUCTION
How did you structure and execute the transaction?
Mitul: Firstly, we considered the assets that the scheme itself held, which were broadly corporate bonds, gilts and swaps, and then we compared those assets to the pricing portfolio that PIC itself would like to hold in order to provide a competitive price. We were also able to provide an asset lock for the scheme to immunise its position against market movements from exclusivity agreed in June, all the way up to execution agreed in October.
Secondly, we considered the availability of reinsurance from counterparties. Across the market, the transaction fostered plenty of interest both for pensioner and deferred lives, and this resulted in PIC securing longevity reinsurance with our preferred counterparty.
And finally, this client was particularly focused on member outcomes and customer experience. That led to numerous discussions throughout the exclusivity period about exactly how that would manifest itself once PIC became the annuity provider for these members.
Coats Group makes thread, which is an energy and water intensive process, but essential for clothing, footwear and other industrial applications. Coats is attempting to make the process greener and more sustainable by targeting reductions in water consumption and carbon emissions. The company has also pioneered a fully recycled thread, using no virgin plastic.
This is an example of the type of company we look for in the Threadneedle UK Sustainable Equity fund: a company that is perhaps under the radar, but a leading player in a fragmented market, standing to benefit from consumer trends towards sustainability.
We met the company’s head of sustainability to understand how its non-financial risks and sustainable opportunities are managed, and our opportunity to ask questions and bring the investment case to life, far more than reading the annual report.
Threadneedle UK Sustainable Equity Fund: Portfolio snapshot
Coats Group
Johnson Matthey
Reckitt
Johnson Matthey is a chemicals company that makes solutions for cleaner energy and cleaner air. It has an experienced board and is investing in new and future technologies such as fuel cells and hydrogen. To continue driving its sustainability agenda, this year, it is incorporating ESG and sustainability criteria in executive pay.
Improvements are expected in its top line, margin and cash flow. We believe it is undervalued and, when you combine that with the fact that well over 80% of its revenues contribute to the UN SDGs, it is one of the leading companies within the fund.
To have confidence in our investment, engagement is key. We have met management, board members and collectively engaged with the UN Principles for Responsible Investment on its supply chain. This gives us a better understanding of the risk/return characteristics.
Reckitt is a health, hygiene, and nutrition company. It has had big changes in management and strategy over the last few years and now it is embracing its size and scope, driving more from the group level. As a result, it is well-positioned to effect change.
There is a big focus on how its products are made, with reductions in energy and water usage and more recycling. Reckitt works alongside governments and public health bodies to educate people on issues including cleanliness, infant nutrition, sexual health – this is on top of the positive impact of its products within its hygiene, health and nutrition divisions.
Again, engagement is key: we have met the CEO, CFO, chair, directors in charge of executive pay, heads of sustainability to enable us to get a holistic picture of how the company is improving its management of ESG and sustainability.
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MARKET OUTLOOK
Source: Morningstar as at 31 July 2021, net of fees, based on Z Acc share class (ISIN: GB00BZ21SS97). Net performance using 12pm prices, unadjusted income reinvested. Peer group is IA UK All Companies. The index is a Composite benchmark. The fund launched 30 October 2015. Past performance is not a guide to future performance.
Threadneedle UK Sustainable Equity Fund: Performance (%)
Fund (net)
FTSE All-Share
IA UK All Cos
3yr
5yr
2020
2019
2018
2017
2016
Since Launch
Year to Date
18.6
44.5
-0.5
21.6
-7.0
14.0
6.7
53.4
9.5
6.6
27.0
-9.8
20.5
-9.2
12.4
12.3
38.8
11.7
12.7
44.0
-7.7
21.9
-10.3
13.0
11.7
49.5
12.3
Will larger schemes continue to seek to buyout?
Mitul: We think this transaction forms a blueprint for how large pension schemes in the UK can fully immunise themselves from investment risk, demographic risk and legal risk that may sit on their balance sheets through their legacy defined-benefit schemes.
As schemes continue to mature across the UK, as they become more and more focused on pension members and as scheme funding levels continue to increase, we think buyouts will continue to be more and more prevalent. And this kind of deed poll approach with an elongated timescale, allowing for assets and operational and legal aspects to be considered in detail, is likely to be the way that they are undertaken.
One interesting aspect of this transaction, which we think is going to be more and more prevalent, is the existence of illiquid assets. A number of large pension schemes have small holding of illiquid assets, and consultants and schemes are finding more and more interesting ways to address them. In this case, a loan was made from the company to the trustees to enable a buyout to proceed whilst the illiquid assets were sold over an extended period running into next year prior to wind up.
Our first piece of advice is to have a collaborative approach
What advice would you give to help schemes undertake such transactions successfully?
Mitul: The first is to have a collaborative approach throughout the project. These projects involve hundreds of people across the corporate side, the trustee side, lawyers on both sides and also the insurer. Having all of those people work collaboratively to one common goal is a challenging feat, and involves significant project management.
Secondly, we advise plenty of time. This was an ambitious project that incorporated a number of different aspects in challenging timescales. But those timescales were well trailed approximately 12 months prior to the actual execution of the deal. That allowed us to prepare.
Lastly, we think a dynamic governance process is also important. As and when things come up in a process like this, which they inevitably do, the ability to react, respond and discuss them is critical to ensuring that the transaction stays on track.
Wider implications
INTRODUCTION | Background | Timescales | Residual risk | Wider implications
Wider implications
Residual risk
Timescales
Background
INTRODUCTION
Will larger schemes continue to seek to buyout?
Mitul: We think this transaction forms a blueprint for how large pension schemes in the UK can fully immunise themselves from investment risk, demographic risk and legal risk that may sit on their balance sheets through their legacy defined-benefit schemes.
As schemes continue to mature across the UK, as they become more and more focused on pension members and as scheme funding levels continue to increase, we think buyouts will continue to be more and more prevalent. And this kind of deed poll approach with an elongated timescale, allowing for assets and operational and legal aspects to be considered in detail, is likely to be the way that they are undertaken.
One interesting aspect of this transaction, which we think is going to be more and more prevalent, is the existence of illiquid assets. A number of large pension schemes have small holding of illiquid assets, and consultants and schemes are finding more and more interesting ways to address them. In this case, a loan was made from the company to the trustees to enable a buyout to proceed whilst the illiquid assets were sold over an extended period running into next year prior to wind up.
What advice would you give to help schemes undertake such transactions successfully?
We worked to quite challenging timescales. The trustee and their advisers engaged PIC and the insurance market approximately 12 months ago, but it was only really in the last three months that they had selected PIC as their preferred insurer.
Over the course of the three months, we
had to set up a new administrator to administer the benefits after buyouts, make sure we were operationally ready for both the buy in and the buy out, undertake the due diligence, and work on the policy documents, deed poll and supporting contracts. So quite a lot of resource was required to ensure that those elements could all be reviewed and set up in that time.
Fortunately we had a collaborative approach with both the administrator and the trustee which meant we were able to get to a good outcome.
Our first piece of advice is to have a collaborative approach
Residual risk
