Rolls-Royce's record pension buy-out advised on by Mercer

18 June 2019 4 min. read

Global actuarial consultancy Mercer has advised the Rolls-Royce UK Pension Fund on a record buy-out worth over £4.6 billion. The move is aimed at removing future risk from the balance sheet of the engineering firm.

The UK’s collective pensions assets currently total around £3 trillion – making the British pension pot one of the world’s largest, accounting for close to 5% of global funds. While the total pension asset pool seems large, however, an ageing population, and the threat of rising unemployment among younger generations mean that the pensions and actuarial sector faces some unique challenges in its rapidly approaching future.

To that end, recent years have seen a number of high profile companies working to off-load their hefty pension funds. For example, following a takeover by Indian steel operator Tata, British Steel declared it was no longer able to support its pension scheme – one of the UK’s largest – without becoming insolvent. The company – which would enter insolvency in 2019 anyway – transferred over to the Pension Protection Fund (PPF), a government-backed pensions lifeboat.

A number of other businesses have mooted similar courses of action, often as part of pre-pack administration procedures. Following a takeover by controversial retail tycoon Mike Ashley, House of Fraser placed its pension pot with the PPF, however this deal also highlighted the problems connected with such behaviour. Workers were left facing cuts to their hard-earned pensions of up to 10% through no fault of their own, and the negative press surrounding this is arguably something a company looking to turn its results around can ill afford.

Rolls-Royce's record pension buy-out advised on by Mercer

A mega pension buy-out

Instead then, Rolls-Royce has opted for a less controversial route to separating itself from its pension fund. Under the stewardship of CEO Warren East, Rolls-Royce has undertaken a massive restructuring exercise, selling under-performing units, stripping out layers of management and launching plans which will ultimately see almost 5,000 staff leave the business. In the latest of the firm’s moves designed to remove future risk from its balance sheet, Rolls-Royce has offloaded a £4.6 billion chunk of its pension scheme to Legal & General in the biggest buy-out of its kind in the UK.

Rolls-Royce said in March 2019 that its UK pension fund had assets of £12.8 billion and a surplus of £1.9 billion, but that its overseas pension plans had a deficit of £1.3 billion principally made up of unfunded US healthcare and pension plans, and unfunded German pension plans. The UK aerospace group consolidated its main pension fund with three of its other UK pension schemes in 2016 to form the Rolls-Royce UK Pension Fund.

The move will now see Legal & General take on responsibility for paying the pensions of some 33,000 out of a total of 76,000 members of the Rolls-Royce pension scheme. It covers about a third of the scheme’s total assets.

Joel Griffin, Rolls-Royce’s Pensions Head, said the agreement would mean “increased security for Rolls-Royce pensioners and reduced risk for our business.” Griffin added that “as a result of this deal the provision of benefits will be governed by stringent funding requirements, resulting in a secure pension environment for our pensioners.”

Mercer, which now constitutes the largest pensions consultancy in the UK, acted as the Trustee’s strategic investment advisor for the record-breaking partial buy-out. This saw Mercer advise on the premium payment portfolio, the continuity of the retained investment strategy to support the remaining members, and managing the transition of premium assets to Legal and General.

James Maggs, Partner at Mercer and lead investment advisor to the Trustee remarked, “This ground-breaking transaction is the latest in a line of success stories for the Rolls-Royce UK Pension Fund, whose funding surplus is testament to exceptional risk management over a sustained period. We are proud to have assisted the Trustee over many years on this journey and in this latest achievement.”