Pension buy-outs gathering pace

Pensioners are continuing to live longer than before

The insurance firm Friends Provident has become the latest big company to off-load part of its pension scheme.

Responsibility for paying 3,200 pensioners in the Friends Provident final salary scheme has been transferred to Norwich Union.

Earlier this week the platinum mining company Lonmin sold its entire scheme to the specialist pension fund insurer Paternoster.

Pension experts expect that other big employers will soon do the same.

Last week the actuarial firm Lane Clark and Peacock predicted that at least 10 firms in the FTSE 100 were planning to offload their pension schemes this year.

"Scheme benefits and how they are paid are unaffected," said Mike Hampton, chairman of the Friends Provident pension scheme.

"For our pensioners, it's business as usual, but this investment means that we have an asset that will pay out exactly what we need to meet our pensions in payments."

Reducing risk

Employers have been looking for ways to avoid the continuing responsibility of providing final salary pensions to their staff, even when the schemes have been closed to new joiners.

They have the protection that no matter how long the pensioners live, the Norwich Union has to keep paying them Mark Duke, Towers Perrin

In the case of Friends Provident, the pension scheme's trustees have bought a very large bulk annuity with the Norwich Union to cover its pensioners' payments from now on.

About a third of the scheme's assets, worth £350m, are being transferred to the Norwich Union as part of the arrangement.

The pensioners will still remain part of the Friends Provident scheme and the trustees will still be fully responsible for ensuring they are paid.

But a novel feature of the deal is that if Norwich Union is unable to pay the pensions, for instance as a result of insolvency, then the trustees would be able to get their hands on the remaining assets to continue paying the pensioners.

"It's similar to an escrow account and can be used if things go horribly wrong," said Mark Duke of the consultants Towers Perrin, who advised on the deal.

"But from the trustees' point of view they have the protection that no matter how long the pensioners live, the Norwich Union has to keep paying them," he added.

Longevity

In February, the Pensions Regulator started consulting on new guidance to pension schemes which would force many to substantially increase the assumptions they make about how long their members are likely to live.

The regulator said it might start investigating schemes which did not assume a male life expectancy of at least 89, known as the "long cohort" projection.

However, the National Association of Pension Funds (NAPF) has said this approach might be too aggressive.

"Using the long cohort mortality assumption as a 'trigger' for further regulatory scrutiny will push trustees into using it regardless of the specific circumstances of their scheme," said Nigel Peaple of the NAPF.

"This issue matters as the wide scale adoption of this assumption, even where it is not appropriate, will increase liabilities and scheme costs," he added.