BP is in talks over a landmark insurance deal for its £30bn final salary pension fund as rising interest rates give companies the chance to shift billions of pounds of liabilities off their books

 ( FT- July 7) Trustees for BP’s UK defined benefit scheme, which has more than 60,000 members, are in talks with multiple insurers over a so-called buy-in deal, according to five people familiar with the discussions, which has the potential to be the biggest in the history of the industry.

Higher rates have transformed the health of corporate pension schemes, leaving many in surplus after more than a decade in which their bond portfolios provided lacklustre returns. The turnround in their fortunes over the past year has kick-started the market for corporate pension deals, where schemes pay insurers to take on the responsibility for some or all of the pension promises made to staff.

The improvement in schemes’ funding has reduced the risk to insurers of such deals, which include members living longer than expected or returns falling short, while also making them cheaper for companies. JPMorgan has estimated that about £600bn of the £2tn in UK defined pension scheme liabilities could be transferred to insurers in the next decade. A deal for BP’s scheme would likely set a new record, eclipsing the £6.5bn of pension liabilities that RSA agreed to transfer to the Pension Insurance Corporation in February. “

The market has really exploded this year on the back of improved funding and there’s a lot of large schemes looking at transactions,” said Charlie Finch, partner at LCP, the actuarial consultants.

A BP pension trustees spokesperson said they had a duty to “continually review and assess all investment options to manage the security of the fund and members’ benefits”, adding that “such options include long-term insurance policies”. The spokesperson said that as part of the deal under consideration there would not be a full sale of the scheme, or buyout, and that it “would continue to operate as normal under the oversight of its independent trustee board” and communicate with members over the decision.

There is no guarantee the talks with insurers will lead to a deal.

Energy analysts suggested the move could help improve BP’s credit rating, because rating agencies can assess pensions as liabilities. S&P ranks BP’s long-term credit as A minus compared with Shell’s A plus, raising the cost of financing for the company.

For much of the past two decades, companies have had to inject cash from their operations into schemes stuck with deficits.

The UK final salary scheme, which has been closed to new members since 2010, had a surplus of at least $4bn as of the end of 2022, according to BP’s annual report. The fund and its surplus is carried on the company’s balance sheet.

BP has faced criticism from some members of the fund this year after it declined to raise annual benefits above a 5 per cent cap, despite a recommendation from the scheme’s trustees to award a 9 per cent raise, with inflation soaring in the UK.

BP said on Friday that not awarding a larger increase had been “a difficult decision”, arguing it had to balance the “interests of our many stakeholders, including customers, employees, retirees and shareholders across the world”. BP added that many of the company’s “retirees are outside the UK and most are not in inflation-linked final salary pension schemes”.

The BP pensioners group, made up of around 1,000 former staff in the UK, has questioned whether the company could be looking to “hive off” the fund and potentially take some of its surplus, warning in a letter to a parliamentary committee earlier this year of “an assumption about the company’s right to recover that surplus”. Accessing the surplus would only be possible, however, with the full buyout or wind up of the fund, which the fund trustee says is not actively under consideration. Following confirmation that the BP scheme was considering buy-in options, the pensioners group called on the trustees to commence a full consultation with the plan’s 60,000 beneficiaries.

“This must involve substantive and proper involvement of all fund members,” the group said. One former BP senior executive said it was “odd” that the company had not tried to reach some sort of compromise with pensioners in the fund by offering a large increase in benefits.

“They could have comfortably met them in the middle,” the former executive said, cautioning that any attempt to one day access the surplus would leave the company facing “20 years” of angry interventions at its annual general meeting.


Written evidence submitted by a group of BP pensioners to the House of Commons Select Committee on Work and Pensions inquiry into DB Schemes.

See https://committees.parliament.uk/work/7369/defined-benefit-pension-schemes/publications/

and for the 7 page report https://committees.parliament.uk/writtenevidence/121851/pdf/

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