Pearson completes £500m pensions buy-in

Pension nest, piggy bank

Education and learning organisation Pearson has completed a pensions buy-in transaction totalling £500 million.

The buy-in policy has been completed with Legal and General Assurance Society for The Pearson Pension Plan. This will operate alongside two previous buy-in transactions, purchased in 2017 with Aviva and Legal and General, to cover approximately 50% of the scheme’s pensioner liabilities, amounting to an estimated £1.8 billion in total.

The transaction forms part of the pension scheme trustees’ strategy to reduce risk by aligning investments more closely with the pension benefits payable to members. The buy-in further transfers the longevity risk from Pearson to Legal and General, reducing the pension risks being underwritten by the organisation and awarding extra security for members.

The buy-in policy has been designed to make monthly payments to the pension plan equal to the future pensions for approximately 50% of the scheme’s liabilities, to reduce the risk that Pearson will be required to contribute additional cash to the pension plan in future, and to provide extra security for the pension scheme beyond the protections available as standard under the insurance regime.

Pearson’s 2017 buy-in arrangements allowed for future buy-in transactions to be executed using the same terms; in this case, this enabled the pension scheme trustees to take advantage of attractive insurance contract pricing.

Members will see no change in their pension provision, as the buy-ins are held as investments of the pension scheme.

Lane, Clark and Peacock (LCP) acted as lead adviser to the trustees during the transaction process, and law firm Linklaters provided legal advice.

Clive Wellsteed, partner at LCP, said: “The Pearson Plan conducted the largest buy-ins of 2017 at £1.2 billion and set up umbrella contract structures to allow quick follow-on transactions that benefit from the same attractive terms as the initial buy-ins.

“The ease of execution under the umbrella contract meant a win-win for the trustee, [which] was able to lock in attractive pricing relative to the very latest longevity trends, and Legal and General [which] got off to a strong start to 2019. The trustee was able to complete the transaction about two weeks after receiving pricing.”

Adolfo Aponte, director at Lincoln Pensions, added: “Pearson’s insurance buy-in is a great example of what is increasingly called endgame planning, which seeks to protect the pension promise as it unwinds over 60-plus years. This is something that most corporates and their schemes are inevitably keen to do, the challenge is to do it in a cost-effective way, having taken into consideration the strength of the covenant offered by the insurers active in this market.

“While the market is familiar with the use of insurance to reduce investment and liability volatility, it is also important to note that actions like this reduce the scheme’s exposure to Pearson and vice versa.

“We expect more schemes and corporates to follow the likes of Pearson and Smith Group, which has also progressively been reducing covenant reliance on the group through buy-ins for a number of years, and estimate that we could see as much as £30 billion of similar transactions before the end of the year.”