Aon Hewitt advises Lehman on 675m pension buy-in

15 May 2015 3 min. read

Aon Hewitt has helped secure a £675 million buy-in transaction for the trustees of the Lehman Brothers Pension Scheme with Rothesay Life. The transaction – the biggest bulk annuity deal of the year so far – means that the schemes’ members will receive their full benefits.

With a lack of regulatory oversight, and the incentive for profits high – Lehman Brothers ratcheted up its leverage ratio, from 23.7 times in 2003 to 30.7 times in 2007. With many of its loans in the sub-prime mortgage market, the 2007 – 2008 housing market downturn saw the end of the bull run of record profits enjoyed by the bank – and as of the 15th of September 2008, the bank itself. The effect on staff have been wide ranging, with many of those in its pension scheme concerned that they may not see some of their expected benefits.

Lehman Brothers Pension Scheme

In the case of Lehman’s UK Pension Fund, it was recently announced that the trustees of the Lehman Brothers UK Pension Scheme had agreed a £675 million buy-in transaction with Rothesay Life. With the announcement it has been made clear that the schemes around 2,250 members will see their full benefits. Aon Hewitt served as actuary and investment advisor for the scheme, which included the switching to bonds and to gilt assets to ensure that the assets closely tracked the bulk annuity price in the run-up to the transaction. The deal follows an agreement struck in August between PwC – the administrators of the collapsed bank – and the trustees of the Lehman Brothers Pension Scheme about financing the deficit.

“This transaction has been very complex given the detailed negotiations that have taken place regarding the shortfall in assets, and we are delighted at the outcome that members will now receive their benefits in full rather than at the reduced level that has applied since 2008”, says Paul Belok, partner and risk settlement specialist at Aon Hewitt. “We helped the trustees understand the bulk annuity market, and ensured that the trustees were able to draw out differences between the insurers which participated in the market review.”

Paul Belok and James Mullins

"Since the bankruptcy of Lehman Brothers ... the trustees have been striving to secure the pension benefits promised to members of the scheme," states Peter Gamester, chairman of the trustees of the scheme, in a statement. "The agreement with Rothesay Life achieves this goal, as it enables members' defined benefit entitlements to be paid in full."

According to James Mullins, Partner at Hymans Robertson, the deal represents the “biggest bulk annuity deal of 2015 so far”, adding that the transaction was “well-timed” given the fact that Solvency II will come into effect at the start of 2016. “The introduction of Solvency II is likely to push up the cost of bulk annuities for deferred members. Under the new regime insuring younger members of pension schemes will be considered a greater risk. This will require more capital to be set aside, putting upward pressure on pricing for buy-ins and buy-outs involving younger deferred members.”