NatWest Offloads £11 Billion Pension Scheme in Record-Breaking Deal

The high street banking giant has agreed to outsource roughly a third of its £33bn retirement scheme to Rothesay in the biggest-ever deal of its kind, Sky News learns. This deal marks a significant step in the growing trend of companies seeking to insure their pension risks, with NatWest ranking among the UK's largest pension scheme sponsors.

Rothesay Wins Bidding War

Sky News has learnt that pension trustees at NatWest, which is on track to become wholly owned by private sector investors after more than 15 years in partial taxpayer ownership, have offloaded a roughly £11bn chunk of its corporate pension scheme to Rothesay. The deal is a landmark in the accelerating trend for companies to insure their pension risks, with NatWest ranking among the UK's biggest pension scheme sponsors.

Pension Risk Transfer: A Growing Trend

The deal is a landmark in the accelerating trend for companies to insure their pension risks, with NatWest ranking among the UK's biggest pension scheme sponsors. Several people familiar with the transactions said the counterparty was Rothesay, which declined to comment on Tuesday.

In a statement issued to Sky News, a spokesperson for the NatWest Group pension fund confirmed the deal, saying: “As part of its long-term strategy, the Trustee of the NatWest Group Pension Fund has recently insured around one-third of the Main Section with buy-in policies. The buy-in policies are Fund investments that further improve the security of member benefits by increasing protection against demographic and investment risks. As with other investment decisions there is no change to member benefits and members will continue to receive their benefits directly from the Fund.”

Unprecedented Deal Size

This deal eclipses the previous record holder, Boots, which announced a £4.8bn buy-in deal with Legal & General a year ago. The deal is also a major boost for Rothesay, which has been actively seeking to expand its presence in the UK pension risk transfer (PRT) market. This market has seen a surge in activity in recent years, as more and more companies look to offload their pension liabilities to specialist insurers.

Risks and Rewards of Pension Risk Transfer

Corporations engage in PRTs with insurance firms to reduce the risk of accruing a pension deficit which will need to be funded from their cash flows. The NatWest scheme was not in deficit as of 31 December 2023, when liabilities of £26.5 billion fell far short of the £33.6 billion worth of assets. Corporations will often pay hefty sums to unload pension risk when their schemes are in deficit. Similarly, insurers will pay to take on risk when there is a surplus.

NatWest's Move: A Strategic Decision

The NatWest Group Pension Fund's decision to offload a significant portion of its liabilities to Rothesay is a strategic move designed to mitigate the risks associated with its pension scheme. By transferring these liabilities to a specialist insurer, NatWest is freeing up capital that can be used for other purposes, such as investing in its core banking business. The deal also provides greater certainty for pension scheme members, who can now be confident that their benefits are secure, regardless of future market volatility.

The Future of Pension Risk Transfer

The NatWest deal is a strong indicator of the growing appetite for pension risk transfer (PRT) deals in the UK. The market is expected to continue to grow in the coming years, as more and more companies seek to offload their pension liabilities to specialist insurers. This trend is being driven by a number of factors, including:

• The aging population: As people live longer, the cost of providing pensions is increasing. This is making it more difficult for companies to fund their pension schemes, leading them to seek out PRT deals to reduce their exposure.

• Low interest rates: Low interest rates are making it more expensive for companies to fund their pension schemes. This is because they are earning less on their investments, while the value of their liabilities is increasing. PRT deals can help companies to reduce these costs.

• Regulatory pressure: The UK government is encouraging companies to reduce their pension liabilities. This is being done through a number of measures, such as the introduction of a new pension risk transfer (PRT) framework. This framework has made it easier for companies to enter into PRT deals.

The Last Word

NatWest's record-breaking £11 billion pension deal with Rothesay is a significant milestone in the evolution of the pension risk transfer (PRT) market. It highlights the increasing demand for PRT deals and the growing role of specialist insurers like Rothesay in managing pension risks. This deal will likely pave the way for more large-scale PRT transactions in the future, as companies seek to manage their pension liabilities more effectively and secure the financial well-being of their employees.