UK - Over 90% of trustees and industry professionals believe insurance companies do not always need to offer additional security in pension-buy-in transactions, although it improves their credibility if they do so, Hewitt Associates has revealed.
The results of a debate, hosted by the consultancy firm last week, relate to the use of security options which can allow trustees to claim a special surrender or termination value from an insurer in the event of certain insolvency triggers.
These could include non-payment by the insurer of its liabilities under the bulk annuity policy if it is not remedied within a reasonable time limit; or if the insurer is bought by, or merges with, a third party and the trustee believes the new structure weakens the insurer's covenant.
Hewitt claimed the 93% vote against the motion "Insurance companies should always offer additional security in pension buy-in transactions" suggested the audience - comprising scheme trustees and other industry professionals such as insurers, lawyers and consultants - considers the premium for this protection option could be better spent on securing other members' benefits.
Andy Reed, DB solutions director at Prudential, said in favour of the motion that although "the primary consideration for trustees considering a buy-in transaction should be choosing an insurer in which they have full confidence, strong insurers are well placed to offer additional security for larger transactions. If trustees are prepared to pay for additional options, why shouldn't insurers offer these?"
But James Parker, partner at Barlow Lyde & Gilbert LLP, argued this security "typically adds 1-2% to the premium and adds significant complexity to the transaction; the value delivered by these structures can vary hugely depending on the transaction itself, the trustees' views about the availability of the FSCS and the performance of assets in any ring-fenced account within the security structure".
Despite the majority vote against the need to always offer security options, over three-quarters of the audience, 76%, claimed, "the granting of additional security enhances the credibility of the insurer".
Antony Hayes, head of pension risk transfer at Hewitt, added: "The value of security will differ from one group of trustees to another. No-one enters a buy-in transaction expecting to surrender the policy. However for many people, the knowledge that they can do so if they need to is of great comfort and value. We welcome these new options, and think that it is a credit to UK insurers that they have developed them so quickly."
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