UK - The risk transfer approach as a solution to covering pension fund liabilities is not seen as a threat by Mark Wood, founding chief executive of pension buy-out firm Paternoster. He adds that Paternoster might in future make use of such an approach.
This follows the launch of an insurance for managing UK defined benefit (DB) pension schemes' risks and volatility by risk transfer solution firm PensionRisk, based in London.
With its PensionsRisk Insurance (PRI), the firm targets medium to large sized DB pension schemes It says that these plans are employers' biggest problem due to their potential high volatility and scheme deficits.
PensionRisk says that the full DB pension buy-out, while taking the problem away from a sponsoring company, is an expensive option. As an alternative, it offers an insurance contract, which transfers the risks to insurers to protect the development of closed DB schemes over a 10-year period.
During the policy, the insurer funds all pensions to scheme members and at the end of the period returns the assets at least equivalent to the value of the scheme liabilities, so the scheme is in zero deficit.
Due to changes in longevity, a 10-year policy is "a better bet" than a buy-out, according to consultant Andrew Campbell-Hart, one of the partners in the PensionRisk joint venture with law firm Beachcroft and consultancy firm Paterson Martin.
Arguing that the insurance creates "significant" stability but at a lower cost, Campbell-Hart said: "£30m buys you complete extinction, £5m buys you protection for 10 years. And you tell me, because we don't know anything about the future, which is the better bet?"
The insurance is mainly aimed at the UK, though the firm is looking to also offer PRI in the US. No pension schemes have signed up yet, but a number have shown interest, according to the firm.
Mark Wood said PensionRisk is not a threat: "On the contrary, I think that if the product is well priced, it may well be something that we will make use of ourselves. It is a variation on short term reinsurance and its value will depend on the pricing, but I am sure that some companies will find the proposition attractive."
Paternoster announced that in 2006 it had been selected by pension fund trustees as the annuity provider for schemes totalling £300m.
"At 2006 year end, the total value of assets transferred to Paternoster in relation to these [£300m] was £123m," the firm added.
Wood told IPE: "We were quite surprised by how quickly the market developed and is developing."
For 2007 he predicts that many more company will look to transfer the risk of the costs of their DB pensions to an insurance company, "and many of those companies will be strong companies, with strong balance sheets, and they will be looking to avoid risk," Wood said.
He foresees further growth over the two years: "Companies are considering the combination of improving life expectancy and the changes to the accounting standards FRS17, which require more executive disclosure of pension liabilities. In addition, the increasing costs of the PPF are causing these companies to consider whether now is the time to transfer the DB pension plan off the balance sheet."