Out-Law / Your Daily Need-To-Know

Out-Law Analysis 4 min. read

Pensions risk transfer: reinsurer requirements

As bulk annuity policies become larger and more complex, it is becoming more important for reinsurance to be put in place by the insurers to hedge all or some of their risk.

In these transactions, the trustee’s counterpart will be the insurer. However, the insurer’s reinsurers are likely to have requirements which will need to be delivered by the trustee, and where the insurer splits risk between reinsurers, the bulk annuity policy may need to accommodate the requirements of two or more reinsurers.

Reinsurer issues that could impact trustees’ bulk annuity contracts

The following are issues reinsurers are likely to focus on and that could have an impact on the trustees’ bulk annuity contract terms.

Quality of data

The reinsurer will be relying on scheme data and will price based on this. The reinsurer will want to ensure that any data warranty is robust and to review any disclosure letter. If the warranty offered to the insurer is weak, the reinsurer may wish to bolster it.

Provision of data

The reinsurer will need to receive scheme data and ensure that the data provided by the trustee is able to be passed by the insurer to the reinsurer and is broad enough to cover data items which the reinsurer needs to be reported. These items may be broader than those items required by the insurer and may, for example, include experience data.

Read more on pensions risk transfer


The reinsurer is likely to need to audit the pension scheme, so the bulk is likely to include provisions permitting the reinsurers to accompany the insurer on its audits. The trustee will want to ensure that these audit rights are not so wide as to be practically cumbersome.

Data protection

Allied to this from a trustee perspective is data protection as data, and potentially personal data and sensitive personal data, is likely to be transferred to the reinsurer. Many reinsurers are not UK-based and may not even be EU-based. As a result, the data protection restrictions in the bulk annuity will need to be balanced to permit onwards disclosure and protect the trustee’s data. Some reinsurers require payroll extracts so that they can carry out their own existence checks and this will put additional weight on data protection provisions.

Existence checking and sanctions checking

The reinsurer will be relying on the trustee to carry out sufficient existence checking and sanction checking exercises as its requirements to suspend and reinstate will in practice, pending buy out, be met by the trustee. These may also need to be bolstered where they are not strong enough.

Termination of the reinsurance

The reinsurance agreement will require processes to be carried out when it terminates, including potentially an existence check and sanctions check and an audit, each of which will need to be permitted under the bulk annuity – including in circumstances where the bulk annuity itself terminates.

Warranties and undertakings

The reinsurer will be interested in the warranties and undertakings given by the trustee. However, the reinsurers and insurers interests are likely to be aligned in practice, so the reinsurer is unlikely to introduce additional requests into the bulk annuity contract.

Bulk annuity policy and reinsurance to stay together

Broadly speaking, insurers in the UK are able to transfer insurance policies and reinsurance policies without the consent of their counterparties. In practice, the reinsurer, indeed no party, is likely to want the reinsurance policy to transfer without the underlying bulk transferring with it. Provisions may be included in the bulk annuity policy to mitigate this from occurring.

Trustee compliance with the bulk annuity policy

This is a hot topic between the insurer and the reinsurer as, on the one hand, reinsurers are reliant on trustee performance for their reinsurance not to be adversely affected but, on the other hand, the insurer will not want to unwillingly adversely affect its relationship with its trustee client. Much of this will be an issue for the insurer and reinsurer in the reinsurance agreement but the reinsurers may also take comfort if there are additional protections or incentives in the bulk annuity policies. Examples include whether reinsurer existence checking results can be used for the purposes of the bulk annuity contract and if claims under the bulk annuity policy can be temporarily reduced if the trustee fails to comply with certain of its obligations.

Insurer-reinsurer issues can impact trustees’ bulk annuity contracts too

There are also some issues between the insurer and reinsurer which may feed through to the trustees’ bulk annuity contract terms.

In relation to trustee compliance with the bulk annuity policy, the reinsurer may introduce commercial incentives on the insurer to enforce compliance – for example, decrements or a termination right if matters persist over a prolonged period.

Reinsurers will also not want the insurer to amend the policy, or the underlying bulk, in respect of issues that impact the reinsurer without consent.

In addition, selection risk may occur, for example, where there has been a partial buy out but the bulk terminates leaving the reinsurance covering just the remaining bought out population. This may have an impact on the reinsurer’s economic exposure, and they may seek protections in this event.

Actions for trustees

Although trustees will only be party to the bulk annuity policy, the transaction as a whole is likely to include one or more reinsurance agreements. As a result, it may be advantageous, at outset, for trustees to view the transaction holistically and consider and cater for what requirements a reinsurer may need to prevent delay or execution risk down the line.

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