Bulk Insured Pensions - A Good Practice Guide - NAPF

22 ABI GOOD PRACTICE GUIDE
4.2.2. Surrender terms for Buy-ins
Whether the policy is to be held as a long term Buy-in, or as a transition phase to
Buyout, the trustees may seek to secure future surrender terms.
Insurers are generally reluctant to provide surrender terms but in some situations,
for example on breach of solvency levels, a surrender of the policy may be triggered.
However, this will have an impact on the insurer’s capital, asset management strategy
and reserving, and trustees should expect to pay a premium for this option either
explicitly at outset or as a deduction in the calculation of the surrender payment.
4.3. Collateralisation
Some trustees will wish to consider a collateral arrangement and insurers have
developed structures designed to ensure that, under specified circumstances,
the scheme is able to retake control of its assets rapidly and at a level that meets
the pension liabilities. For short term Buy-ins leading to Buyout, collateralisation is
rarely necessary.
This option may be a more sensible consideration for long-term Buy-ins, however, it
will duplicate protection mechanisms put into place under the current FSA regime,
such as the high levels of additional solvency capital that insurers are required to hold.
Trustees should note that the Solvency II regime is likely to make structures that
allow them to surrender the bulk policy more capital inefficient for insurers and
hence more expensive.
Examples of collateral deals:
• Collateral – where additional funds are held to support the 10% liability not
covered by the FSCS
• Ring fenced pool of assets – where the insurance assets supporting the scheme
are held separately from the other assets of the insurance company. Under certain
circumstances, for example insolvency, a charge can be crystallised and the assets
can be recovered by the scheme.
• Other structures – for example deposit back where the scheme assets are paid
across as part of the premium but they are then deposited back normally with a
third party asset manager to manage as part of a standalone ring fenced fund.
A collateral structure will cost more to reflect the additional costs of the
administration work and the impact of a potentially restricted future investment
environment for the insurer. The Trustees need to understand whether this
additional security is of value taking into account cost, effort, available security
from the employer, the insurer’s reserve capital and the protection of the Financial
Services Compensation Scheme which covers 90% of the insured benefits, leaving
the employer with a residual risk of the remaining 10%. To date, no UK insurer has
ever been unable to pay a contractual annuity payment.
Collateral structures are generally only available on transactions over £300 million.