UK pension trustees warn against offshore risk transfer

Senior industry professionals are concerned about the increasing involvement of foreign reinsurance companies operating outside UK regulations in corporate pension arrangements.

Many UK companies with large pension plans have sold them to life insurers. These “buyouts,” of pension plans, and the assets that support them, are considered the gold standard in safeguarding benefits.

As higher interest rates led to a record £50bn in corporate pension deals, some UK-based life insurers passed on portions from these pension schemes assets and liabilities, usually based in Bermuda. These “funded reinsurance deals” reduce the capital requirements of life insurers and make it easier to enter into new deals.

Natalie Winterfrost is a former chair of The Society of Pension Professionals’ investment committee and a professional trustee.

They will be subjected to different, and possibly less strict regulatory oversight.

She said: “This is the point at which trustees and their advisors are most concerned.”

Victoria Tillbrook is a UK pensions specialist at PwC. She said that “more and more”, trustees want to understand what the insurers are doing, what’s being reinsured, and what the UK Financial Services Compensation Scheme does, which compensates clients if an financial business fails.

Melanie Cusack is a professional trustee with Zedra, an enterprise that provides corporate services. She said: “More people are asking: what happens if the reinsurer dies? What happens to its members?”

The Bank of England’s Prudential Regulation Authority (which supervises insurance companies) declined to comment.

warned last year that the industry’s reliance on funded reinsurance might create “systemic vulnerabilities” in the event of reinsurers going bankrupt and forcing the original life insurance companies to pay pension benefits without having the assets underpinning them.

As part of its proposed safeguards, the regulator wants insurers to limit how much reinsurance funded they can do with a single counterparty.

The Association of British Insurers (ABI) welcomed the PRA’s acknowledgement of the importance of Reinsurance for well-functioning Insurance Markets. They said that the sector provided “vital protection” and “peace of mind” for pension scheme members as well as employers.

In private, insurers emphasize that funded reinsurance is a small part of pension buyouts, and that a major reinsurer’s failure will not cause life insurers to have any serious problems. The FSCS will step in if a failure occurs.

Disclosure of funded reinsurance only covers a portion. Legal & General closed £3.2bn worth of deals in 2012, Just Group £0.4bn during the same time period, and Pension Insurance Corporation a total of £2.5bn by June of last year. Rothesay, however, did not close any deals, according to sources familiar with the facts. All declined to make a comment. Aviva and Phoenix Group declined to provide any figures.

Kunal Sood said that the industry has “strict due diligence and regulation to ensure decisions are made with policyholders interests over the long term.”

He said funded reinsurance is one of many risk management strategies used by Phoenix, “as part a wider strategy for maintaining a well-diversified and robust balance sheet to protect policyholders”.

The UK Pensions Regulator stated that it was closely monitoring the market and working on “a number of initiatives” in conjunction with the Bank of England.