UK pension trustees raise alarm on transferring risks offshore

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Senior industry professionals say they are worried about the growing involvement of overseas reinsurance firms operating outside UK regulation in corporate pension deals.

Many UK businesses with large pension schemes have offloaded them to life insurance companies. These “buyouts” — of pension plans and the assets backing them — are regarded as the gold standard for safeguarding benefits.

But as higher interest rates improved pension scheme funding levels, prompting a record £50bn of corporate pension deals last year, some UK life insurers have passed on portions of these pension scheme assets and liabilities to reinsurers, often based in Bermuda. Such “funded reinsurance” deals reduce capital requirements for life insurers, making it easier for them to do further deals.

“We don’t believe we fully understand the risks associated with these offshore insurance companies,” said Natalie Winterfrost, a professional trustee and former chair of the investment committee at The Society of Pension Professionals.

“They will be subject to different and potentially less stringent regulatory oversight.”

She added: “This is where the disquiet comes in for trustees — and their advisers too.” 

Victoria Tillbrook, a UK pensions expert at consultancy PwC, said “more and more” trustees wanted to fully understand developments in what insurers were doing, what was being reinsured and the position of the UK’s Financial Services Compensation Scheme, which compensates customers if a financial business fails.

Melanie Cusack, a professional trustee at Zedra, a corporate services business said: “More questions are being asked: if something happens to the reinsurer, what happens to the members?”

The Bank of England’s Prudential Regulation 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 case of reinsurers failing and the original life insurers having to pay the pension benefits but without the underlying assets.

The regulator has proposed that insurers limit how much funded reinsurance they do with any one counterparty, among other safeguards.

The Association of British Insurers welcomed the PRA’s acknowledgment of the importance of reinsurance to well-functioning insurance markets, and said the sector gave “vital protection and peace of mind” to pension scheme members and employers.

Privately, insurers stress that funded reinsurance represents a small proportion of pension buyout deals, and that even a large reinsurer failure would be unlikely to create major problems for life insurers. They also point out that the FSCS would step in if there was a failure.

Disclosure on funded reinsurance is partial. Legal & General did £3.2bn of deals last year, Just Group £0.4bn in the same period and Pension Insurance Corporation a cumulative total of £2.5bn as at June last year, while Rothesay does not do any, according to people familiar with the details. All declined to comment. Aviva and Phoenix Group did not provide figures when asked by the Financial Times. 

Kunal Sood, managing director of defined benefit solutions and reinsurance at Phoenix’s Standard Life business, said the industry had “strict due diligence processes and regulation in place to ensure decisions are managed with policyholders’ interests in mind over the longer term”.

He added funded reinsurance was one of a number of risk management measures used by Phoenix “as part of a wider strategy to maintain a well-diversified, robust 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.