L&G wins 2.5 billion-pound defined benefit pension deal

By Carolyn Cohn and Freya Berry

LONDON (Reuters) - Insurer Legal & General has won a contract to take on 2.5 billion pounds of risk from TRW Automotive's pension scheme and insure over 22,000 of its pensioners, as firms seek to offload costly pension liabilities.

Many British companies' defined benefit - or final salary - schemes are in deficit, hampered by low interest rates which make it harder to achieve the investment returns needed to pay pensioners in the scheme.

British insurers meanwhile, are looking to fill a gap in their business through such "bulk annuity" deals after pension reforms this year halved sales of individual annuities, which provide pensioners with an income.

Legal & General (L&G) has been working with TRW's pension scheme since 2007 and the deal announced on Thursday materially de-risks the remaining pension obligations of TRW according to Neil Marchuk, chair of the firm's Trustee Board. The scheme had assets of 3.5 billion pounds as of March 31.

L&G has won 8.3 billion pounds of annuity deals this year, it said in a statement on Thursday, including a 3.0 billion pound bulk annuity deal with the ICI Pension Fund.

"2014 has been a landmark year in the pension de-risking market with the two largest bulk annuity transactions in the UK, both with Legal & General," said Kerrigan Procter, Managing Director, Legal & General Retirement.

The British defined benefit pension market totals more than 1 trillion pounds, according to industry estimates, with around 11 billion pounds in bulk annuity deals agreed this year.

L&G has captured the majority of this year's transactions but other insurers such as Prudential and Standard Life are also active. The process is complex, with the insurer assessing the life expectancy of each individual pensioner.

Most defined benefit schemes are closed to new members and many companies do not want to act as manager for a pension scheme that has little to do with their day to day business or existing employees, according to David Ellis, principal at Mercer, lead adviser on the deal.

Insurers, meanwhile, are seeking to put their pensions expertise to new use following the pension reforms, announced in March and effective from April 2015.

"It's a happy marriage," Ellis said.

Pension liabilities can be a drag on a company's share price. Funding of defined benefit schemes deteriorated by nine percentage points to 88 percent between March and Sept 2014 due to lower gilt yields, according to pensions industry data.

(Editing by Simon Jessop and Elaine Hardcastle)