Future-Proofing Pension Risk Transfers: Worth the Cost?

Law firm Herbert Smith Freehills has advised investors seeking to buy-in or buyout to ask for more risks to be covered than just inflation, interest rate, and longevity.

(October 16, 2013) – Investors seeking a pension risk transfer transaction should not be afraid to negotiate on ways to future-proof their deal, a lawyer told the Europe’s biggest pension conference.

Samantha Brown, partner at Herbert Smith Freehills, told delegates at the National Association of Pension Funds conference that when negotiating a buyout or buy-in, investors should ensure they know exactly what risks their premium will cover.

While all contracts will see the insurer take on the risks for longevity, interest rate, inflation, and investment, Brown argued that investors can negotiate for other risks to be taken on by the insurer, at a cost.

“There are other risks insurers are willing to talk about, including guaranteed minimum pension equalisation methodology,” said Brown.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Other risks being brought to the table by investors include indexation risk—what happens if retail price inflation and consumer price inflation stop being published—data error risks, benefit error risks, and deflation risks.

“The key point is they all have a pricing implication so you should raise issues early if you want them to be covered,” Brown continued.

“Everyone should be clear on what the policy should cover at the outset. If insurers have to go back at a later stage it can cause hiccups.”

One of Brown’s colleagues, Alison Brown, also suggested a way of keeping the price demanded by the insurers low: set up a working party.

“Insurers are likely to take your transaction more seriously if you have a working party, and that can lead to a better quote,” Brown said. “Insurers will offer a better quote to those they think are serious about transacting.”

One thing to watch insurers negotiating for was further contractual agreements on how the pension risk transfer would be maintained in the event of the pension fund falling into the Pension Protection Fund (PPF).

Under the Pensions Act, the PPF has the power during the assessment stage to cancel any contracts that they consider to amount of “onerous provisions”, a term which as of today has no clear definition.

This, Brown said, made parties which contract with pension funds nervous, and could result in the insurer seeking greater security for the pension risk transfer deal.

aiCIO will be reporting from the NAPF conference in Manchester all this week: follow us on Twitter to keep up to date with the latest news @ai_CIO.

(October 15, 2013) – The Oklahoma Teachers Retirement System’s (OTRS) board has fired its Executive Director James Wilbanks.

The board of trustees claimed Wilbanks did not secure required approval for severance packages from the state Office of Management Enterprise Services.

The 13 members voted unanimously at a special closed-door session earlier this month to dismiss the executive director.

“The board’s decision to terminate Dr. Wilbanks was based on initial information that caused concerns about the day-to-day decisions of the director, which were significant enough to warrant the board’s vote to terminate,” a statement from the board said.

For more stories like this, sign up for the CIO Alert newsletter. 

Wilbanks, reached by phone at his home by aiCIO, said he was informed of the firing immediately following the meeting.

“During my time at the Oklahoma Teachers Retirement System, the board decided that it was no longer their will for me to be the executive director, and I accept that decision,” he said.

He had been with the system for just over four-and-a-half years.

Public records of the board discussing Wilbanks’ termination go back to a July 24 meeting agenda: “Item 13 - Executive session regarding personnel matters relating to the position of executive director of the OTRS.”

“The severance packages went to people serving in an administrative function,” the former pension head said. “They were let go as a result of us finding efficiencies and saving money. The board was certainly aware that were working on a program of being more efficient and saving money.”

However, Wilbanks said, the trustees were not necessarily aware of every lay-off, but rather of the overall program.

Indeed, both he and the board noted the fund’s improved financial position under Wilbanks’ leadership.

During his time as director, Wilbanks streamlined agency operations and saved the agency millions of dollars, the board’s statement said. “But complying with state statute is not optional.”

Several of the trustees declined to answer any questions regarding the circumstances surrounding the dismissal, or did not return requests for comment.

The fund spokesperson would only say it was a “personal issue,” and that an independent audit was underway.

Both Wilbanks and a spokesperson confirmed his removal to aiCIO, although he is still listed as executive director on fund’s website.