Coats Group PLC (LSE:COA) said it has cleared all of the liabilities of its legacy defined benefit pension scheme following a £1.3 billion trustee buy-in from Pension Insurance Contribution (PIC), the scheme’s insurer.
The bulk annuity policy purchase covers 80% of the scheme's liabilities and follows a similar bulk annuity sale of 20% of the scheme's liabilities in December 2022.
This buy-in is the final and most significant step in fully insuring its UK pension obligations, said a statement from the textiles group.
“All the financial and demographic risks relating to the scheme's liabilities are now fully hedged, with the two policies paying the scheme a regular stream of income that matches its pension payments to all members.”
Coats also has the option to remove the scheme fully from its balance sheet in the future at "very limited" further administrative cost.
As part of the buy-in deal, Coats will contribute up to £100 million of final additional funding, comprising £70 million upfront in cash and a further £30 million as a loan to the scheme.
Coats stopped making top-ups to the scheme of around US$30 million per annum in January 2024 with these payments now ended permanently.
Debt gearing or leverage will increase modestly in 2024 due to this funding cost, said the statement, but be within the group’s target range of 1-2 times.
“Moving forward, the structural improvement to cash generation will allow increased investment in growth or the return of excess capital to shareholders,” it added.
Jackie Callaway, Coats’ chief financial officer, commented: "The purchase of this bulk annuity policy represents a critical final step in de-risking our UK defined benefit pension scheme.
“This brings us close to the end of a lengthy journey of funding our UK pensions.
“From having $3 billion of liabilities across three schemes in 2016 with a Technical Provisions deficit of c.$750 million, we are now securing fully insured benefits for our pensioners and removing volatility and uncertainty for our investors."
"Now that the scheme is fully funded and cash contributions have ceased this will lock in a significant improvement in the group's free cash generation.”