UK pension trustees raise concerns about funded reinsurance transfers

Pension trustees have expressed concern about transfers of pension plans and the assets backing them to overseas reinsurance firms, many of which are based in Bermuda, according to the Financial Times.

The newspaper reported that the transfers are regarded as “the gold standard for safeguarding benefits”, adding: “But as higher interest rates improved pension scheme funding levels, prompting a record £50 billion 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.”

The story quoted Natalie Winterfrost, a professional trustee and former chair of the investment committee at The Society of Pension Professionals, saying: “We don’t believe we fully understand the risks associated with these offshore insurance companies. They will be subject to different and potentially less stringent regulatory oversight.

“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 FT said 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.

The newspaper did not seek comment from the Bermuda Monetary Authority or Bermuda International Long Term Insurers and Reinsurers (BILTIR), but Bermuda:Re+ILS has made a request for comment.

The BMA is currently reviewing its regulatory standards for long term insurers and both it and BILTIR have said in the past that the regulator always consults with the relevant overseas regulator when considering giving approval to portfolio transfers, which are required in all cases.

The FT article notes 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.

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.