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Legal & General Assurance buys auto firm pension assets

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LONDON—Insurer Legal & General Assurance Society Ltd. is taking on the pension plan liabilities of a defunct British automotive parts producer in what is described as the largest pension plan buyout ever in the United Kingdom.

Under the arrangement, Legal & General, which competed with several other insurers to win the business, will assume control of £1.1 billion ($1.76 billion) in plan assets.

In turn, Legal & General will pay benefits to the 30,000 participants in the Turner & Newall plan. Those benefits will at least equal, and in some cases exceed, what participants would have received had the plan been taken over and administered by the U.K. Pension Protection Fund.

The U.K. fund, which is loosely modeled on the U.S. Pension Benefit Guaranty Corp., was set up in 2005 to meet the unfunded pension benefit obligations of insolvent employers with underfunded pension plans.

“This is the largest transaction to date,” said David Ellis, a principal with Mercer Ltd. in London, which was retained by plan trustee Alexander Forbes Trustee Services Ltd. to obtain bids from annuity providers.

Even with the annuity deal, however, plan participants will not receive all of their promised benefits, such as certain benefit increases to reflect rises in the cost of living.

Such pension plan buyout arrangements are required under British law, where trustees of an underfunded pension plan sponsored by a failed company are required to seek bids from insurers.

“Because the scheme's financial strength exceeds the threshold below which the PPF would automatically step in, the trustee must by law prepare to wind up the scheme outside the PPF,” Legal & General said in a statement.

The transaction comes as U.K. employers, like their counterparts in the United States, continue to move away from defined benefit plans, typically by closing the plans to new employees or halting benefit accruals for current participants.

In fact, a 2010 report, known as The Purple Book and jointly published by the Pension Protection Fund and the Pensions Regulator, found that less than 20% of defined benefit plans were still open to new employees.

“An enormous percentage of plans are closed to entrants,” said Phil Waldeck, a senior vp in Hartford, Conn., with Prudential Retirement, a unit of Prudential Financial Inc.

Concerns about the volatility of required contributions due to interest rate fluctuations and uncertainty about future costs due to greater longevity are driving the move away from defined benefit plans, U.K. pension plan experts say.

In addition, to a much greater extent compared with the United States, British plan sponsors are adopting a “derisking” strategy—known as pension buy-ins—in which the employer turns over a fixed amount of plan assets to an insurer, which takes on the liabilities for certain plan participants, such as current retirees.

“Derisking is a natural thing to do as many plan sponsors do not see their pension plans as part of their core business,” said Martin Bird, a managing principal with Aon Hewitt Ltd. in London.

The only U.S. employer that has completed a pension buy-in arrangement is Hickory Springs Manufacturing Co., which this year purchased a buy-in policy from Prudential Retirement. That effectively transferred to Prudential the liability for about $75 million in pension benefits earned by about 1,000 retirees in the plan offered by the diverse Hickory, N.C.-based company.

Under the arrangement, Hickory Springs transferred just less than $75 million from its pension plan to Prudential Insurance Co. of America, which holds the assets in a separate account. Under pension rules, the value of the account is counted as an asset in Hickory Springs' pension plan.