Case study

The ICI Pension Fund multiple buy-ins

Imperial Chemical Industries (ICI) was, for many years, the largest manufacturer in Britain. ICI made speciality products, including paints, food ingredients, polymers, electronic materials, fragrances and flavourings. The ICI Pension Fund, a £10 billion UK pension plan with c.56,000 members, is one of the largest and most mature DB pension plans in the UK. 80% of liabilities are in payment with £500m of annual pension payments

ICI’s unique governance structure

In March 2014, Legal & General entered into its first buy-in arrangement with the ICI Pension Fund covering £3 billion of liability as part of the Fund’s long term strategic de-risking plan. This was the catalyst to the Fund establishing a unique governance structure to ensure future tranches of buy-in could be completed quickly and efficiently, including the £750m buy-in completed within eight working days of the “Brexit” vote - locking into the resulting increased affordability due to the market volatility.

Innovative umbrella contract

The umbrella contract enables the Fund to transact quickly on pre-agreed terms with any of its panel of three insurers. By ensuring the important terms are set out in a master framework agreement, each additional transaction requires only a short schedule setting out the specifics of that deal (e.g. premium, assets to be transferred). This structure streamlines the legal work required and ensures the Fund is well placed to transact quickly whenever market conditions lead to favourable pricing.

Regular price points

The Fund data is updated, cleansed and split into bite-sized tranches (about £350m each) on an annual basis. This enables the insurers to act quickly, focusing on the issues which really matter to the premium – investment strategy, pricing assumptions and reinsurance strategy – rather than spending time finding and resolving data issues. The ICI Trustee has identified a panel of insurers who price each of the tranches on a regular basis against a price “target”. Insurers enter the pricing process knowing that a transaction will be completed if the pricing is acceptable to the Trustee which enables us to be proactive rather than reactive in seeking attractive matching assets or reinsurance pricing.

Robust governance

One of the most important factors in allowing a quick reaction is the governance process. By delegating authority to smaller committees with well-defined responsibilities and price targets, trustee boards can position themselves to react much more quickly when buy-in pricing might move in their favour. For the transaction in June 2016, the ICI Trustee Investment Committee was able to convene a meeting at very short notice (and at 7.30pm on a Monday evening!). Without that flexibility it is easy to see how favourable pricing could be quickly lost in market movements.

What does the ICI structure demonstrate?

  • For pension schemes on a long-term de-risking journey to buy-in or buyout, being able to transact quickly, when market conditions are favourable can significantly reduce the cost, risk and time to achieve the ultimate endgame.
  • Establishing structures similar to the ICI structure can allow transactions to complete very quickly, ensuring those windows of affordability are not missed.
  • A regular flow of transactions with clearly defined price targets allows insurers to seek out opportunities to invest in assets or reinsurance which can significantly increase affordability.