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Mercer is lead trustee advisor on UK’s largest pension buy-out


Mercer acted as lead trustee advisor on the UK’s largest defined benefit pension scheme risk transfer project which included the GBP2.5 billion Legal & General Assurance Society (L&G) buy-out of part of the TRW Pension Scheme. 

Mercer also acted as strategic corporate adviser on the wider de-risking of TRW’s UK, US and Canadian pension arrangements in a coordinated series of exercises. Based in the US, with offices around the world, TRW is a global leader in automotive safety with 2013 sales of USD17.4 billion. The L&G buy-out covers 22,000 UK pensioners in payment.

The UK transaction consolidates Mercer’s position as UK market leader in advising on large-scale pension buy-outs. Mercer has been the lead adviser (and in most cases was also the actuarial/investment adviser) on all four buy-out transactions involving a premium over GBP1bn to have taken place in the UK to date. The transactions are Thorn, GBP1.1bn, 2008; T&N, GBP1.1bn, 2011; EMI, GBP1.5bn, 2013 and TRW, GBP2.5bn, 2014.

The full UK risk transfer project, which was designed to remove the financial risk posed by TRW’s UK pension scheme, included a variety of pension risk management exercises, which ran concurrently, including a pension increase exchange (PIE), an enhanced transfer value exercise (ETV), winding up lump sums, and equalisation of guaranteed minimum pensions (GMP) and a pensioner buy-out.

Mercer’s David Ellis, lead adviser on the transaction with L&G, says: “Mercer’s market-leading annuity broking and investment advisory capabilities ensured that the complex transaction was a success. The innovations employed here work for plans of all sizes and shows what can be achieved when companies and trustees use a combination of de-risking strategies.”

The TRW Pension Scheme employed an investment strategy, implemented following the 2008 downturn, which resulted in a gradual improvement in the funding level, allowing TRW to embark on this multi-stage risk transfer project.

An important aspect of the transaction was the price lock and related transition of the assets from the pension scheme to L&G. The leading-edge structure of the deal allowed the trustee to lock in to pricing terms early in the project to provide certainty for all parties. Assets were subsequently transitioned to reflect progress in a Pension Increase Exchange exercise and to take advantage of market conditions. “The innovative features of the transaction, negotiated and monitored by Mercer, allowed the Trustee and all of its advisers to progress efficiently the asset transition. The innovative features of the transaction included a complex price tracking mechanism to control pricing risks and the efficient use of the pension scheme’s assets”, says Suthan Rajagopalan of Mercer, lead investment adviser for the transaction.

Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group and strategic advisor to TRW, adds: “The advisory teams have undertaken a range of other de-risking activities and it’s the combined impact of these activities on the plan’s finances that is genuinely new. Prior to the buy-out, Mercer worked with TRW to manage the risks posed by deferred members – people who no longer pay into a plan but don’t yet take their pension benefits. We conducted an enhanced transfer value exercise covering 9,000 members. Additionally, members with small pots were also offered a lump sum in lieu of further plan benefits and as part of the PIE exercise, some guaranteed minimum pensions were equalised and converted to non-GMPs. All in all, this was a complex project, but the resulting cost-effective reduction in the scheme’s liabilities has demonstrated the value of the work, which has taken most of the year to complete.”

Mercer acted as strategic corporate adviser to TRW, lead bulk annuity broker and as investment adviser in relation to the bulk transfer for the Scheme’s trustee.

Advising the TRW pension scheme trustees on the bulk annuity purchase, the Mercer team consisted of: David Ellis, Harry Harper and David Barker with Suthan Rajagopalan and Matt Stephenson leading on the price tracking and asset transition. Advising TRW Corporate, the Mercer team included Adrian Hartshorn, Chris Hawes, John Martin, Simon Bramwell and Matthew Demwell.

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