How we helped Northern Bank to address longevity risk with a £680m collateralised pensioner buy-in

Financial institutions have to hold capital against the longevity risk within their own DB pension plans so reducing both longevity and investment risk was a key objective for our client. They also wanted to enhance cashflow matching of pensioner liabilities, achieve value for money in buy-in pricing and terms and have the flexibility to insure new retirees on competitive terms.

The background

• Bank-sponsored DB pension plan with assets of c£1.25bn
• Approx. 5,000 members (1,000 active; 2,000 deferred; and 2,000 pensioner)
• Open to accrual and rapidly maturing. Young pensioner population (average age 62)
• Strong focus on de-risking: c70% hedged against interest rates and inflation, but longevity risk not yet addressed
• CPI and RPI pension increases in payment
• Longevity identified as dominant risk

Our solution

Collateralised buy-in

• A ring-fenced pool of assets held in the Trustee’s name by its own custodian
• Prudential maintains excess collateral
• The Trustee has recourse to these assets in certain circumstances, for example should Prudential’s financial position deteriorate beyond pre-defined triggers or should it fail to meet its obligations

Pension increase mismatch

• Whilst all RPI-linked increases were perfectly matched, to obtain better value for money the Trustee purchased fixed 2.5% pa pension increases where these would otherwise be subject to CPI capped at 2.5% pa
• The value of the over-insurance created when CPI is less than 2.5% in a year can be used to add new members to the policy, or the surplus cash refunded to the Trustee
• The policy has flexibility to move to CPI pension increases in future - eg when the market for CPI assets is more developed so offers better value

The results

Northern Bank Pension Scheme completed a successful £680m collateralised pensioner buy-in with Prudential. Features of the buy-in included

• Security structure to maximise protections for members’ benefits and Bank sponsor
• Innovative provisions and flexibilities to add future retirees to the policy on efficient terms
• Carefully constructed pension increase mismatch to maximise value for money without creating additional risks for Trustee
• Reduced volatility of pension risk capital requirement for Bank sponsor