Disclosures Require an Upgrade : Pension Risk Transfers

Actuarial and Accounting Standards can be Exploited or Sidelined

NatWest / Rothesay Case Study

Introduction
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Pension Risk Transfers (PRT) are a £50 billion a year business segment, with assets being handed over to life insurers by DB pension schemes in exchange for taking on risks as assessed.  Credible “run-on” Alternatives to PRT have to be considered by trustees ahead of PRT’s under Technical Actuarial Standard 300 Version 2 in place from April 2024.  DWP’s new Funding and Investment Strategy (FIS) requirements were introduced in September 2024 requiring a reset.  In addition, Government is making access to surpluses by members and sponsors more straightforward.

Disclosures

Current disclosures and the approach adopted by professionals can result in relevant standards being exploited or sidelined.

A raised level of disclosures is needed to ensure that all stakeholders can see deals are fair and reasonable.
This note proposes that disclosure levels should match those required by other corporate activities under the Listing Rules.  

Disclosures proposed are:

• Material contract terms: Parties and key clauses covering residual obligations, restrictive covenants arising with an on-sale and with reinsurance.
• Profit / loss price paid to life insurer and comparison with actuarial and accounting valuations.
• Scheme track record:  Assets, liabilities and cash contributions over not less than 5 years.
• OCI: Items taken through Other Comprehensive Income over last 5 years.
• “Background to and reasons for the transaction” section.

Member and sponsor access to share of surpluses on an ongoing basis and on the wind up of the scheme can be part of a wider assessment.

The following is a recent case study on NatWest’s buy-ins.  All parties to risk transfer deals and related consultants may suggest that they are not under a specific requirement to be more transparent.  That is why an urgent review is needed of what information needs to be disclosed involving FRC (ARGA); FCA (Listing Authority); IFoA and IASB.  “Disclosure” is a sensible follow up subject to its excellent reports on defined benefit pension schemes by the Work and Pensions Select Committee.  HM Treasury and DWP can reasonably reflect on whether the massive risk transfer industry is really operating in the way they want.

NatWest Example:  Buy-in Transactions 2023 / 2024:  Case Study

The need for clarification of disclosure is seen from the recent NatWest sale of around a third of its pension liabilities to – it is understood - Rothesay.  

Of note is:

• The deal was agreed in September 2024:  No disclosure.
• The deal was referenced in NatWest’s third quarter figures in its Interim Management Statement (IMS) announced on Friday 25th October:

What has now emerged as an £11bn risk transfer deal, agreed in September, is referenced in a short note on page 30 of the Group’s 3rd Quarter Results announced on Friday 25th October.

The Interim Management Statement:

Page 30:  Pension Risk:
In September 2024, the Trustee of the NatWest Group Pension Fund entered into a further buy-in transaction with a third party insurer for some of the liabilities of the Main section. Around a third of the Main section is now covered by insurance policies that give protection against demographic and investment risks, improving security of the member benefits. The transaction does not affect the 2024 statement of comprehensive income because the net pension asset is limited to zero due to the impact of the asset ceiling.
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This is correct because there is a £7.4bn buffer created by the accounting standard IFRIC14 which means surplus is not being booked because “the trustees may have control of the surplus”.  This is set out in the 2023 accounts.  The question for trustees and the Board should be to explain what the plan is.​

The wording of the IMS is vague and provides no meaningful context.  That a third of the scheme’s liabilities, nearly £10bn, is not referenced.  What the cost of the deal is to be covered out of a surplus of £7bn – which in any case will be lost below the line taken to Other Comprehensive Income – is not explained. 

No reference is made to the exercise which must have been carried out by the actuaries to comply with Technical Actuarial Standard 300 V2.  Why the transaction is better for members or why the parties have not found a more positive use for the major accounting surplus receives no comment.

Trustees – given their control over a surplus – are well placed to seek improved terms for members.  NatWest could be looking to a surplus to help fund / improve current pension provision.

The deal has a precedent and with comparably limited disclosure.  In 2023 NatWest had undertaken a buy-in of one section of the scheme – which may have already had buy-in features.  The cost of the deal against book values is not explained in the accounts.  The OCI is used as a way to mix up numbers to provide a hash total and ensure the cost of the deal is not revealed.

(i) Media Coverage of Buy-in
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The Group provided some clarification when on Tuesday 5th November Sky News reported that a transaction had taken place.  Rothesay declined to comment and NatWest did not confirm the counter party was Rothesay.  That is 10 days after the transaction was referenced in the third quarter figures.

NatWest Group, the high street banking group, has struck what is thought to be the UK's biggest-ever deal to outsource pension payments to a specialist insurance company.

Sky News has learnt that pension trustees at NatWest, which is on track to become wholly owned by private sector investors after more than 15 years in partial taxpayer ownership, have offloaded a roughly £11bn chunk of its corporate pension scheme to Rothesay, the England cricket team's Test match sponsor.

The deal is a landmark in the accelerating trend for companies to insure their pension risks, with NatWest ranking among the UK's biggest pension scheme sponsors.

Its group retirement scheme has about £33.6bn in assets, while it had roughly 190,000 members at the end of September.

The latest deal was disclosed - without reference to Rothesay - in NatWest's third-quarter results statement published last month, but has not been publicly reported.

"In September 2024, the Trustee of the NatWest Group Pension Fund entered into a further buy-in transaction with a third-party insurer for some of the liabilities of the Main Section," the statement said.

Several people familiar with the transactions said the counterparty was Rothesay, which declined to comment on Tuesday.

In a statement issued to Sky News, a spokesperson for the NatWest Group pension fund confirmed the deal, saying: "As part of its long-term strategy, the Trustee of the NatWest Group Pension Fund has recently insured around one-third of the Main Section with buy-in policies.

"The buy-in policies are Fund investments that further improve the security of member benefits by increasing protection against demographic and investment risks.
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"As with other investment decisions there is no change to member benefits and members will continue to receive their benefits directly from the Fund."
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The trade press dutifully then referenced the transaction.

​(ii) The Precedent in the 2023 Annual Report and Accounts

The cost of fixing out permanently certain scheme liabilities through a buy-in in 2023 is referenced in Note 5 on page 322 of the 2023 Annual Report and Accounts.  The actual number is not provided.  It is netted against other items reflecting market movements and changes in measurement shown below the line as part of Other Comprehensive Income.  This is reported on page 299 (extract follows).

Investment Strategy (page 322, note 5 Pensions)
During 2023, the Trustee completed a buy-in transaction for the AA section of the Group Pension Fund, passing all material longevity and investment risk for the section to an insurer. At 31 December 2023, the assets of this section comprised mainly of the buy-in asset (a bulk annuity policy valued at £546 million under IAS 19, covering 99% of the defined benefit obligation attributable to this section), together with residual assets of c. £145 million. In exchange for an upfront premium paid to the insurer, the buy-in asset provides a stream of cashflows to the Trustee replicating payments due to members. 
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The premium was determined by the insurer using its pricing basis. Under IAS 19, the value placed on this asset mirrors the valuation of the defined benefit obligations covered, incorporating an assessment of credit risk. Since the insurer’s pricing basis is more conservative than the best-estimate valuation under IAS 19, an asset loss arises at the outset, which is recognised through OCI along with the impact of other movements in asset values over the year. In future, the buy-in asset value will move in line with movements in the defined benefit obligations covered, meaning that the scheme is protected against longevity and market risk

Consolidated Statement of Comprehensive Income (Page 299) 

(iii) Extracts from the 2024 Report and Accounts

​Pension Risk – page 265 : Reference to “buy-in” : 
The first reference by NatWest or the trustees to the scale of the deal is on page 265 of the 2024 Report and Accounts of NatWest Group.  It refers to a “third party insurer”.  There are 17 references – primarily as part of notes on risk management – to buy-in in over 400 pages with no reference to any particular insurer.

“During 2024, the Trustee of NatWest Group’s largest scheme (the Main section of the NatWest Group Pension Fund) completed buy-in transactions with a third party insurer (buy-in asset valued at £8.0 billion under IAS 19, covering around a third of the defined benefit obligation attributable to the Main section). Under the buy-in insurance contracts, the insurer makes payments to the scheme to cover pension benefits paid to members. As a result, the insured portion of the scheme is protected against all material longevity and investment risks.”

Consolidated Statement of Comprehensive Income (Page 294) 
As in the 2023 Report and Accounts, there is a line item in OCI referring to the pension schemes but how this number is reached is not explained.  What is included in the £166m is unclear and un-noted.

NatWest Group Annual Report and Accounts 2024: Pension Notes Section

​NatWest Pension Scheme History 2014 – 2024

Conclusions
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The conclusions from recent deals like that of NatWest and other examples like Michelin Tyres is that disclosures are insufficient.  That allows actuarial and accounting standards to be exploited or sidelined.  Evidence of compliance with TAS300V2 is yet to emerge.  OCI is a dumping ground for awkward numbers.  ARGA when it is turned on needs to radiate authority to the risk transfer industry.

Questions arising from the buy-in:

• The surplus is not recorded given the ceiling imposed by IFRIC14.  The consequence of that is the company cannot use surpluses without trustee agreement.  What is the rule which imposed that constraint and when was it introduced?
• In making contributions in recent years did the sponsor and trustees consider the risk of a trapped surplus?  £12.7bn has been contributed since 2014.
• With Government consulting on use of surpluses, why was a deal in September 2024 appropriate?
• Why has the counterparty not been announced?  Should it be Rothesay, did the ownership by a Singapore wealth fund and an American Mutual factor?  Was Rothesay’s purchase of Scottish Widows Pensions a consideration in relation to concentration risks?
• The scheme has a large accounts surplus but limited exposure to UK productive assets (quoted equity levels are tiny).  Is that appropriate?
• Was a TAS300V2 exercise carried out given the SIP now endorses buy-ins as a technique?  Did the company and trustees request papers on Credible Alternatives?
• Overall, do the parties think that the way the buy-in transaction has been handled can be considered appropriate for a major public company or for such a major pension scheme?

The conclusions from recent deals like that of NatWest and other examples (like Michelin Tyres) and looking at how TAS300V2 is being implemented shows that disclosures are insufficient.  That allows actuarial and accounting standards to be exploited or sidelined.  Evidence of compliance with TAS300V2 is yet to emerge.  OCI is a dumping ground for awkward numbers.  Audit Reporting and Governance Authority “ARGA” when it is turned on needs to radiate authority to the risk transfer industry.