City heavyweights steer 'landmark' £1.2bn Stagecoach pension transfer

Slaughter and May and A&O Shearman are among the firms advising on a pensions transaction that will see the £1.2 billion Stagecoach pension scheme transferred to asset manager Aberdeen under an innovative run-on model.

Slaughters and Pinsent Masons advised Aberdeen, while A&O Shearman acted for transport group Stagecoach on the risk transfer transaction, enabling the scheme to run-on in its existing format rather than move to an insurer buy-out.

The run-on model

Under the deal, Aberdeen becomes the new sponsor and long-term operator of the 22,000-member scheme, assuming responsibility for funding and investment strategy.

This regulated structure allows more flexibility for a return-seeking approach than being locked into the cautious investment strategy that comes with an insurer buy-out. Insurers must follow tight solvency rules that push them into low-risk, liability-matching assets, leaving less room for the kind of diversified, growth-oriented investments a run-on model can support.

The scheme’s existing surplus is a core part of the deal with £50 million being immediately allocated to members, funding a pension increase of around 1.5% and strengthening inflation protection going forward.

A hot market

The pensions risk transfer market has been highly active in the UK this year, with several law firms strengthening their benches. Addleshaw Goddard announced a new hire this week: partner Paul Feathers joins its London pensions team from Gowling, expanding the firm’s de-risking offering.

Simmons & Simmons recently picked up a five-lawyer pensions team from DLA Piper, led by Amrit Mclean as its new global head of pensions de-risking.

Over the past few years, improved funding levels aided by rising gilt yields have reduced the present value of defined benefit (DB) liabilities, making de-risking more affordable and attractive. UK DB pension schemes are currently sitting on a total surplus of £240 billion against long-term funding targets, according to pension consultancy XPS Group.

Buy-ins are another popular type of risk transfer structure, where the scheme stays alive under the same trustees but pays an insurer a premium to cover the liabilities going forward.

A trio of firms, including Slaughters, were recently enlisted on the £4.6 billion pension buy-in deal between Legal & General and car maker Ford, in the UK’s largest pension risk transfer transaction announced this year. That followed PIC’s £4.3 billion buy-in of Rolls Royce’s pension scheme in August.

Given insurer constraints and the growing appeal of models that let schemes capture more of their own investment upside, the Stagecoach-Aberdeen structure could continue to gain traction as an alternative to offloading schemes to insurers.

Advising

Slaughter and May’s team was led by pension partners Charles Cameron and Chris Sharpe, who earlier this year also advised Aberdeen on its DB surplus strategy.

Pinsent Masons also advised Aberdeen with a team that included Glasgow-based partner Cameron McCulloch and London partner Hannah Brader who is also head of corporate financial services.

The A&O Shearman team was led by partner and head of UK pensions, Neil Bowden.