PRA sounds first significant note of caution over corporate pension deals

Interest rate rises have significantly improved funding levels for companies’ retirement plans, meaning many are now considering paying to offload their liabilities to insurers. Data published by the Pensions Regulator (TPR) earlier this week suggests that 25% of UK corporate pension plans can now afford such ‘buyouts’.

But in a speech on Thursday, Charlotte Gerken, executive director of insurance supervision at the PRA, expressed concerns about the capacity in the insurance market to take on pension scheme liabilities. “As deals become larger and increasingly focused on buyouts of complete schemes, we observe [insurers] expanding their risk appetite, sometimes outside their current core expertise,” she said.

She warned that insurers will play an “increasingly important role” in providing financial security to millions of annuity policyholders and must “balance the short-term financial and reputational incentives to grow rapidly, with long-term and enduring financial strength, to meet the long term needs of policyholders and the economy”.

Gerken said that insurers who buy out pension schemes will be required to manage interest rate and inflation risks, which could cause wider issues for financial markets. “Insurers therefore need to understand, as they take on these vast sums of assets and liabilities, how they may become greater sources or amplifiers of liquidity risk,” she added.

Pensions expert Robert Tellwright of Pinsent Masons said: “As demand in the bulk annuity market remains high, and significant pension scheme liabilities are transferred to a handful of insurers, it makes sense for pension scheme trustees, their advisers and indeed the PRA itself to consider whether this concentration of liabilities gives rise to additional or systemic risks.”

He added: “For many years now TPR has been encouraging the consolidation of schemes, and this is perhaps the first significant note of caution from the PRA that an acceleration of consolidation into the bulk annuity market may create its own risks.”

“Insurers will note with interest the warning about increasing their risk appetite ‘outside their current core expertise’, which may well be a nod to the fact that, as more schemes can afford a full buy-out of all liabilities, insurers have developed new propositions to provide a one-stop-shop for the demands of those schemes,” Tellwright said.

He added: “This includes bigger and better defined contribution and additional voluntary contribution facilities; extra cover for certain ‘residual risks’; and funding and premium solutions to avoid trapped surpluses. These propositions have been warmly welcomed by the pension scheme market, but it is clearly important that insurers take appropriate steps to manage the additional risk exposure they can give rise to.”