Future-Proofing Pension Risk Transfers: Worth the Cost?

(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.

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.

Related Content: Is the Pressure to Buyout Putting Members’ Benefits at Risk? and Preparing for Pension Risk Transfer: Which Assets Do Insurers Want?