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The trustees of the Aon Retirement Plan are converting numerous existing buy-in policies to buyouts ahead of insuring the remaining liabilities in the scheme. The fund boasts a large solvency surplus and has given the employer early access to this in exchange for enhanced benefits while the derisking work is underway.
The trustees of the ARP will be seeking a buy-in partner for the roughly £1.3bn part of the £2.3bn defined benefit scheme that has not yet been bought in, trustee chair Jane Curtis, who is also a senior partner at consultancy Aon, said.
However, “there is a very large volume of work to get through before we are in a position to start approaching the market for that purpose”, she said. “When we are ready, we’ll take a go/no go decision again. We are lining up all the ducks to make that move.”
The trustees are looking to convert the existing buy-ins, completed with various insurers, to buyouts ahead of the final transaction. Curtis said they would prefer to stay with the insurers who executed the buy-ins but that this might not be possible in every case, especially for the smaller sections.
“There are a very large number of small ones that were done in the dim and distant past,” she noted.
The most recent buy-in was a £510m deal with Scottish Widows for the Aon Bain Hogg section, concluded in late 2020.
Curtis suggested the decision to keep the scheme going for now was deliberate, but that the trustees will continue on the path of derisking.
“We’ve been in discussions about the long term for more than five years with the employer and planning for this. It's a hugely complex scheme, involving many legacy arrangements,” she explained.
Decision on insurer guided by member options and ESG
Curtis said the ARP trustees place a lot of weight on the experience of the c.13,000 scheme members, including around pensions increase exchange and discretionary inflation uplifts, and that this will inform the choice of insurer.
“We are acutely aware that potentially some of the options members currently have may disappear, so we are keen to work with insurers who are open to improving the member experience, as we are on selecting insurers with the right [environmental, social and governance] credentials,” Curtis said. “It might not be all about price, it will be what we think the overall package does for members.”
The scheme will also look to give members the tools to make informed decisions about these tradeoffs ahead of the transaction.
“In the run-up to us finally pressing the button, we want to give members a great experience in terms of financial advice,” she said.
Aon has early access to surplus in exchange for benefits
While the ARP is undertaking the work to convert buy-ins to buyouts and getting the remaining scheme ready for buy-in, the sponsoring company has been given early access to the “very significant” solvency surplus, which it would normally only have on wind-up, Curtis said. This was negotiated in exchange for additional benefits for members, including targeted discretionary increases, levelling up inconsistent benefit practices and providing members with financial advice. Aon is using the DB surplus to finance defined contribution pensions.
The trained actuary stressed that the trustees were “very aware of the risks and fortunate that the scheme is in a very good position”.
DB surpluses have appeared since gilt yields – used to discount future cash flows – have risen from early 2022 onwards and remain high. There is currently an aggregate surplus relative to long-term targets of about £187bn in DB pension schemes, with combined DB assets of £1,463bn backing liabilities of £1,276bn, consultancy XPS Pensions Group estimated in June. The high funding levels follow a long stretch of poor funding for many schemes during roughly 12 years of record-low interest rates, and many trustees are aware that a change in interest rates and yields could reverse the positive environment for DB.
Where schemes are now in surplus, a growing number of companies are trying to make use of this DB money to make DC contributions, usually by keeping or bringing DC members back into a hybrid trust with the DB section.
