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Senior industry professionals say they are concerned about the growing involvement of overseas reinsurance companies operating outside UK regulation in company pension arrangements.
Many UK companies with large pension schemes have offloaded them to life insurance companies. These “takeovers” – of pension plans and the assets that support them – are considered the gold standard for safeguarding benefits.
But as higher interest rates have improved funding levels of pension schemes, resulting in a record £50 billion of company pension deals last year, some UK life insurers have shifted parts of these assets and liabilities pension schemes to reinsurers, often based in Bermuda. Such “funded reinsurance” arrangements reduce capital requirements for life insurers, making it easier for them to enter into further deals.
“We don’t believe we fully understand the risks associated with these offshore insurance companies,” said Natalie Winterfrost, professional fiduciary and former investment committee chair at The Society of Pension Professionals.
“They will be subject to different and potentially less rigorous regulatory oversight.”
He added: “This is where the concern comes in for trustees – and their advisers too.”
Victoria Tillbrook, a UK pensions expert at consultancy PwC, said “increasingly” trustees want to fully understand developments in what insurers do, what is reinsured and the position of the UK’s Financial Services Compensation Scheme, which compensates customers in the event of a financial crisis. business fails.
Melanie Cusack, a fiduciary professional at Zedra, a corporate services firm, said: “More questions are being asked: If something happens to the reinsurer, what happens to the members?”
The Bank of England’s Prudential Regulatory Authority, which supervises insurers, declined to comment.
But it warned the industry last year that relying on funded reinsurance could create a “systemic vulnerability” for the sector, in the event that reinsurers fail and original life insurers have to pay pension benefits but without the underlying assets.
The regulator has proposed that insurers limit the amount of funded reinsurance they do with each counterparty, among other safeguards.
The Association of British Insurers welcomed the PRA’s recognition of the importance of reinsurance to well-functioning insurance markets and said the sector offers “vital protection and peace of mind” to pension scheme members and employers.
Privately, insurers point out that funded reinsurance represents a small percentage of pension buyout deals and that even a major reinsurer failure would be unlikely to create major problems for life insurers. They also point out that the FSCS would intervene in the event of failure.
The information on financed reinsurance is partial. Legal & General concluded deals of £3.2 billion last year, Just Group £0.4 billion in the same period and Pension Insurance Corporation a cumulative total of £2.5 billion to June last year, while Rothesay it doesn’t make any, according to people familiar with the details. All declined to comment. Aviva and Phoenix Group did not provide data when asked by the Financial Times.
Kunal Sood, managing director of defined benefit solutions and reinsurance at Phoenix’s Standard Life division, said the industry has “rigorous due diligence processes and regulations in place to ensure decisions are handled with the interests of the insured for the long term.”
He added that funded reinsurance is one of several risk management measures used by Phoenix “as part of a broader strategy to maintain a robust and well-diversified balance sheet for policyholder protection.”
The UK pensions regulator said it was monitoring market developments and was working on a “number of initiatives” with the Bank of England and the PRA.