The trustees of the Coats UK Pension Scheme have agreed a £1.3bn final buy-in for 80% of the scheme’s liabilities. The buy-in premium includes a deferred element while illiquid assets are realised.

 

The scheme of the thread manufacturer bought the policy from Pension Insurance Corporation, Coats revealed this morning. The latest deal follows a £350m buy-in covering a fifth of liabilities with Aviva in 2022.  

 

This final buy-in means Coats has now fully insured its UK pension obligations and could move to buyout in future “at very limited further administrative cost”, the company said. 

 

Chief financial officer Jackie Callaway called the buy-in a “critical final step in derisking” the UK scheme. 

 

“It means we have achieved our ultimate plan of fully insuring the scheme’s pension liabilities in a cost-effective manner and should allow us, in due course, to remove it from our balance sheet. This brings us close to the end of a lengthy journey of funding our UK pensions,” she said. 

 

The trustees said they have worked closely with Coats throughout the process of buying in the remainder of the scheme, and that the company has provided about £100m of special funding to enable the transaction. 

 

The estimated £100m includes a £70m up-front cash payment and a loan of £30m to provide enough funds until some long-term assets can be realised. The scheme will need to liquidate certain assets to meet a deferred element of the PIC premium. PIC received illiquid assets in specie.

 

Trustee chair Chris Martin, from trustee firm Independent Governance Group, said the transaction was significant for the scheme members and sponsor, and thanked PIC “for their innovative, flexible approach to addressing the complexity of the illiquid holdings”. 

The extra money is also for expected future expenses such as GMP equalisation, finalising the administration for a possible future wind-up, and usual admin costs of about US$5m (£3.8m) a year. The company noted that these expenses will vary over the years, so the actual cash funding will be different from the estimate. 

 

In 2016, Coats still had US$3bn of liabilities across three UK schemes with a technical provisions deficit of US$750m. The company reportedly agreed to stop deficit repair payments in January this year and has seen its share price increase by nearly 28% compared to a year ago. 

 
Matt Richards, head of origination structuring at PIC, said: “We are proud to have been able to complete this complex transaction, demonstrating our commitment to meet trustee needs in challenging circumstances."

He added: “One notable feature of this transaction was the active support from Coats as sponsor, reflecting their experience of positive sentiment achieved by aligning shareholder and scheme member interests.”

LCP acted as lead consultants on this latest transaction. The Trustees received actuarial advice from LCP, legal advice from Sackers and investment advice from Redington. The company advisors were Isio and Baker McKenzie, and PIC received legal advice from Herbert Smith Freehills. 

 

As more companies look to free up cash or tap pension surpluses, do you think the money will benefit the UK economy?