In July 2017, the Trustee of the Royal Mail Pension Plan entered into a £450m full buy-in with Rothesay Life covering the benefits payable to members of the Post Office Limited Section. LCP acted as lead adviser to the Trustee.

The background

In 2012 the Post Office was separated from the Royal Mail and the UK government became responsible for the pension liabilities accrued up until 1 April 2012. After 2012, assets and liabilities started to build up for the Post Office employees in the Post Office Limited Section of the Royal Mail Pension Plan (RMPP). As only Post Office employees at 1 April 2012 were included in this Section, the duration of the liabilities is exceptionally long for a pension scheme at 30 years, resulting in significant exposure to interest rate, inflation and longevity risks.

Prior to the buy-in, The Trustee, with sponsor support, had been gradually de-risking investment strategy by reducing equity exposure and increasing the holdings in low risk matching assets. Following closure to future benefit accrual in 2017, further de-risking through the buy-in was a natural next step.

The solution

The process of moving from early enquiries through to closure in July 2017 involved many detailed steps. Careful consideration of a wide range of complex issues was needed in order to complete a risk transfer in a controlled fashion.

The annuity contract means that the Trustee has almost completely de-risked the Post Office Section and its reliance on the Post Office as the sponsor.

Given the ultra-long nature of these pension liabilities, part of which increases each year in line with the Consumer Price Index (CPI), a key aspect to the transaction was Rothesay Life’s ability to source long-dated assets and, in particular, to source CPI-linked cash flows. This meant Rothesay Life was able to offer an attractive price so the Trustee could lock into a favourable position and provide long-term benefit security to members.

Cost certainty was very important to the Trustee. A key requirement was for the buy-in price to be linked to a portfolio of gilts and cash that would be used as payment, to protect against market movements during execution. The transaction also included “Data Risk” so Rothesay Life would pick up costs arising from any errors in the benefits or data being insured that are identified after signing.

The results

LCP helped deliver a £450m bulk annuity contract with Rothesay Life completing in July 2017. Among the highlights of the transaction are:

• The transaction covers the benefits accrued after 2012 for approximately 5,700 scheme members. The benefits that were accrued up to 2012 are paid by the UK government.
• The benefits are largely for members who have not yet retired, with a significant proportion linked to the Consumer Prices Index (CPI) both before and after retirement.
• Early interest in this transaction was secured from insurers in 2016 which provided time for them to source appropriate assets.
• Rothesay Life locked the pricing of the insurance premium to a portfolio of gilts giving price certainty during execution and ease of premium payment once executed.
• The Trustee also carried out a thorough independent legal review of the benefits in order to prepare for swift implementation of a bulk annuity with residual data risk cover

It is through the collaboration of all parties that we were able to lock into this opportunity quickly and achieve an excellent outcome for the Post Office Limited Section.