UK - David Norgrove, former chairman of the UK Pensions Regulator, is set to launch an insurance company to deliver de-risking solutions to UK defined benefit (DB) pension schemes.

According to Norgrove - who was named chairman at PensionsFirst in July - the new insurance vehicle, called Long Acre, will aim to reduce buyout costs by as much as 20% for pension funds over traditional insurance buyouts.

Long Acre Life, which was designed by consultants at PensionsFirst, will target schemes with liabilities of more than £500m (€583m) and create a mutual insurance solution owned by schemes, sponsors and outside investors.

The concept, which is similar to captive insurance, will deliver both a lower cost of buy-ins or buyouts for pension liabilities and the removal of associated balance-sheet volatility, according to PensionsFirst.

Timothy Lyons, chief executive at PensionsFirst, said: "To date, there has been a lack of viable and affordable solutions in the market to help pension schemes reduce the levels of risk that they are running.

"Many large companies use captive insurance to insure their property and casualty risks so as to retain the profit that would otherwise be paid to an insurer.

"But a pure captive solution for delivering pension buyouts would consolidate the pension liability on the sponsor's balance sheet."
While the cost of buyouts varies according to the specifics of each scheme, they have typically been priced at approximately 140% of the IAS19 liabilities and generally been regarded as unaffordable, PensionsFirst argued.

Norgrove told IPE: "Broadly speaking, it wouldn't be unrealistic to assume that if a pension scheme sponsor went to an insurance company and asked for a price to enter into a buyout deal with liabilities of 100 on IAS19 basis, the insurer would charge the fund a 40% premium."

According to Norgrove, this price increase is mainly due to the fact that insurance companies need to take a much more prudent view of the liabilities and adopt a more prudent discount rate, which justifies a first 20% increase.

In addition, Norgrove pointed out that insurance companies tend to charge pension schemes their profits upfront, which adds an additional 20% premium to the total cost of such a buyout deal.

By allowing sponsor and pension schemes to participate in the insurance profit that would otherwise accrue to a third-party insurer, Long Acre Life aims to reduce the ultimate cost of buyouts to around 120%.

Long Acre expects to receive authorisation from the FSA in early 2012.

UK pension schemes have increasingly considered buy-ins and buyouts as part of their de-risking plans in recent months.

The Pension Buyouts 2011 report published by consultancy LCP in June found that nearly £30bn of business had been written by 10 different insurance companies over the past five years, including at least 40 transactions worth more than £100m.