Article 6 December, 2021

Case Study: Buying out with R&M

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River and Mercantile (“R&M”) has a long track record in guiding its fiduciary clients to buy-out. We see the delivery of this goal as the ultimate success for our clients. With our first buy-out completed more than a decade ago, R&M has achieved 16 buy-outs/full buy-ins for our Fiduciary Management clients in the 15 years[1].

Through its partnership with annuity market specialists K3 Advisory (“K3”), R&M can provide support and advice to clients along every step of the path to buy-out. This allows clients to enjoy a seamless journey; from setting targets and providing training to monitoring progress, advising on the suitability of different insurers, getting full market quotations, and ultimately transacting. Here we set out an example of this partnership in action.


Adam Davis, Managing Director of K3 Advisory said, “We were delighted to be able to help this scheme achieve a full buy-out. There are a lot of moving parts to achieve a successful transaction and market volatility can be highly disruptive. The expertise from R&M to be able to lock the scheme assets exactly to the winning insurer’s premium was fantastic – it meant there was one less thing to worry about and increased the chances of a successful transaction materially. We look forward to working with the R&M team again”

This year, it delighted us to conclude a full scheme buy-in for a scheme that has been a long-standing fiduciary management client. This scheme, like many defined benefit pension plans, has a deep history. Established in 1972, for most of the scheme’s journey, the trustees were concerned with keeping pace with the Technical Provisions and not putting undue pressure on the Sponsor, a UK shoemaker. The trustees were earlier adopters of fiduciary management, appointing R&M in 2004.

In 2014 the scheme hit a major milestone, closing to new accrual. So with the future liabilities largely known, and a solvency funding level of 77%[2] the trustees set their sights on a long term funding target of buy-out. As the sponsor wanted to minimise contributions to the scheme, most of this shortfall had to be addressed via investment returns.

In 2018 the trustees moved from hedging liability risks in the Technical Provisions, to hedging a proxy for the buyout liabilities. By using segregated LDI the scheme could reduce risk relative to the buyout liabilities without investing additional capital into the LDI assets. This meant they could maintain the existing target return without compromising on risk management.

As a fiduciary manager, our goal is to safely deliver clients to their end destination. For many, buyout represents the gold standard and we are very proud to have supported another scheme in achieving their objective. This is underpinned by strong investment performance combined with high levels of risk management throughout the journey.” - Ajeet Manjrekar

Over the following three years R&M outperformed the scheme’s buyout liability objective 1.5% p.a.[3] meaning buy-out moved from being an ambition to a potential reality. The scheme looked close to fully-funded on a buy-out basis at the end of Q2 2020[4]. However, trustees can only know the true cost of securing liabilities with an insurer by obtaining quotes. We suggested the trustees spoke to K3 to offer an alternative view of the market and an independent fee quote. The trustees discussed their options with both R&M and their actuary and appointed K3 to approach the insurer market in Q1 this year. K3’s experience in helping smaller schemes to buy-out was an important part of the decision.

The first step was for K3 to provide indicative market pricing. This confirmed the scheme remained close to having sufficient assets without needing additional funds from the sponsor. This gave the trustees the confidence to approach the market for formal quotations.

K3 advised the trustees which insurers were most suitable, prepared the quotation request and finalised the benefit specification with the scheme’s lawyers. The trustees had already cleaned the member data and had no GMP benefits to equalise. This ensured the scheme looked attractive to potential insurers whilst showing the trustees’ willingness to transact if the pricing was right.

The quotations received in early July this year confirmed a full scheme buy-in was affordable. Not only that, competition between insurers for the business meant it could also leave the scheme with sufficient residual assets to cover future expenses. Two insurers had similar pricing after ‘best and final’ offers. The trustees discussed the merits of each and chose their preferred provider following advice from K3.

Because of the inherent flexibility that it brings, R&M provides LDI on a segregated basis to all fiduciary clients. This flexibility is ever more important for annuity transactions, as it enables R&M to deliver the insurer’s ‘price-lock’ portfolio, matching it quickly, cheaply, and precisely.

What is a ‘price lock’? Segregated LDI allowed us to implement the exact portfolio of gilts specified by the insurer, precisely locking-in the price, whilst the trustees finalised documentation with the insurer.

After a last-minute discussion between the insurer and the scheme’s lawyers to agree on the details in the benefit specification, the transaction concluded in September this year, only six months after the trustees had agreed to appoint K3.

This concluded a successful long-term partnership with R&M to a full buy-in requiring minimal funding from the sponsor and working collaboratively with other third party advisors.

[1] Source: River and Mercantile, 28 September 2021
[2] Source: Scottish Widows, Scheme Funding Report as at 1 July 2014
[3] Source: River and Mercantile, 30 June 2021
[4] Source: Mercer, Actuarial Valuation as at 30 June 2020, Preliminary Results

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