Intact Financial Corporation (IFIC) announced February 27 that it has entered into an agreement with Pension Insurance Corporation plc (PIC) to bulk purchase annuities to address the £6.5-billion in pension liabilities related to the defined benefit managed by RSA. The company says the deal removed pension exposure on IFC’s balance sheet by fully insuring its United Kingdom (UK) defined benefit (DB) pension liabilities with PIC.
The deal is expected to eliminate £75-million in funding contribution obligations and release approximately £150-million of capital. To secure the deal, IFC will pay £500-million using excess capital, debt and preferred shares to complete the buy-in. The transition of pension assets to PIC will take place over 12 to 18 months.
Under buy-in annuity purchases, plans – in this case, the Royal Insurance Group Pension and the Sal Pension scheme – continue to pay members directly, receiving an amount from PIC to cover the payments. IFC points out that this differs from a buy out structure under which the plans are terminated and all responsibilities assumed by the annuity provider.
The company says a buy-out transaction is something it will consider in the future, but would not provide any comment on the potential timeline or achievability of such a deal.
“The current market environment provides an excellent opportunity to remove UK pension exposure on IFC’s balance sheet,” says Louis Marcotte, the company’s executive vice president and chief financial officer. “This transaction represents a cost-effective de-risking with the upfront payment approximately equal to the remaining annual funding contributions and the capital released.”
In a video discussing the deal’s strategic benefits, Marcotte and Charles Brindamour, IFC’s CEO point out that the risks associated with the pension plans are not core to Intact’s business. “The buy-in will remove all remaining market and longevity risks associated with the plans from our balance sheet. Even though we were comfortable with these risks, the opportunity to eliminate them is too great to pass. This is particularly true given the plans are closed,” Brindamour says.
The cost of insuring the plans, he says, has come down significantly on the back of a steep rise in interest rates. The transaction, he concludes, virtually eliminates the company’s exposure to UK pension risk.