Coats Group PLC (LSE:COA) said the trustee of the Coats UK Pension Scheme has purchased around a £350mln bulk annuity policy from Aviva PLC (LSE:AV.).
The industrial threads manufacturer said the deal insures benefits payable under the scheme in respect of around 3,700 pensioner and dependant members, representing roughly 20% of the scheme's liabilities.
In a statement the company said: “The purchase of this policy sees all the scheme's financial and demographic risks fully hedged for the covered liabilities. The scheme will receive a regular stream of income that matches the pension payments for the covered members, making it a precise liability hedging asset, thus further de-risking the scheme and reducing future balance sheet volatility.”
The company noted that this builds on the significant positive steps to de-risk the scheme in recent years through which 90% of the scheme's inflation/interest rate exposure have previously been hedged.
“The Aviva buy-in is consistent with Coats' aspiration of fully insuring the scheme and removing it from the group balance sheet” it added.
Once the scheme is fully funded and cash contributions cease, the group's free cash generation will improve significantly allowing increased investment in growth or the return of excess capital to shareholders, Coats noted.
The company estimated the deficit in the Technical Provisions division will fall to around £25mln to £30mln following the buy-in compared to the £193mln deficit on 31 March 2021.
In a note to clients, analysts at City broker Peel Hunt said: “The next triennial takes place at March 2024 and there is a real prospect that the company will no longer have to make pension recovery payments even before then.”
“This increases the potential upside scenario for Coats given that the current Technical Provision equates to c.12% of EV and pension recovery payments are c.25% of free cash flow” they added.