How a charity closed a £5.6m deficit to fully insure its £30m plan

Case studies

Thorough preparation and planning enabled the RMTGB (now part of the Masonic Charitable Foundation) to remove its pension risk within three months following a change in the principal sponsor’s circumstances.

The background

At the 2011 valuation the RMTGB pension plan had a buy-out deficit of £5.6m. The plan was open to accrual, and the sponsor set an objective to fully buy-out in the future. The plan had two non-associated sponsoring employers and in 2016, the principal employer became part of a larger charity.

The solution

LCP took a four-pronged approach:

Robust preparation

As early as 2012 the plan put in place investment triggers to switch return-seeking assets into gilts at pre-defined funding levels and provide a better match for insurer pricing. Within three years this resulted in assets increasing by over 35% – materially reducing the buy-out deficit.

Early work was carried out on the plan’s data, with data cleansing activities and the collection of marital status information in 2013 to help achieve more favourable insurer pricing in the future.

The Plan also closed to future accrual in March 2016 in preparation for buy-out.

Close collaboration between sponsoring employers

Following the announcement of the merger of the principal employer with a large charity, the principal employer set aside funds in an escrow account to meet the remaining buy-out deficit. A separate side loan agreement was put in place to recover the other employer’s share of deficit.

Innovative benefit amendment

The plan had a fixed cash benefit which would have been expensive to insure, so the Trustees converted these benefits into a form which was more efficient to insure.

In doing so the Trustees both increased members’ benefits and saved £1m on the buy-out premium – a “win-win”.

Effective transaction and efficient wind up

LCP’s streamlined buy-in and buy-out service was used, securing the pricing and policy terms sought at the outset.

Following the transaction in September 2016, the good condition of the data meant the plan could complete its data verification by June 2017. The plan moved to buy-out in October 2017, with wind-up due to complete in early 2018, just one year after commencing the buy-out project.

The results

A full buy-out was achieved at attractive pricing with all benefits secured within three months of approaching the market for a total premium of c£30m. The merger of the sponsor with other charities proceeded once pensions risk had been removed.

As a result of all the actions taken, the RMTGB expects to receive a £1m refund from the funds set aside in escrow.

Having made the decision to de-risk and close the staff pension scheme, timing was everything - as was ensuring that the correct benefits were insured for our pensioners, in-service and deferred members. We also needed to ensure that a range of legacy rules and entitlements were accommodated and that the process followed was transparent, met the appropriate regulatory requirements and was affordable to the employers. The support provided by the team at LCP was invaluable throughout the entire process.

Les Hutchinson, Chief Operating Officer