Insurance companies and private equity firms are eyeing up the UK’s £3 trillion pensions savings
The UK’s main financial regulator has told insurance companies it can foresee an “endemic risk” in using insurance cash from foreign companies to pay out pensions.
In an advisory notice sent out to insurance companies last week the Bank of England said it was concerned about an increase in the growing use of a type of insurance known as funded reinsurance.
Gareth Truran, executive director and Shoib Khan director, said there was a risk with this type of funding and that UK savers may be inadvertantly exposed to risks because of its complexity.
The Bank of England did not say pension savers cash was immediately at risk but did said it would be keeping a closer eye on its use and would crackdown on it if necessary.
Funding reinsurance is used by insurers to make sure they can pay out the pensions of the pension schemes they buy. It is provided by third parties, and can be from private equity firms, and other insurance or reinsurance companies.
In recent years insurance companies, including giants like L&G and Aviva, have been buying up some of the UK’s gold plated pension schemes.
When they buy up these pensions insurance companies need to guarantee they can pay out the pensions and benefits guaranteed to the savers so they turn to funded reinsurance.
These insurance buyouts are big buiness and this year pensions consultancy LCP expects at least £50bn worth of pension assets to change hands.
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In order to complete these large deals – involving billions of pounds of savers’ retirement money – the insurance company has to promise to pay out the pensions of the pension schemes members both now and in the future.
This is when the insurance company will turn to funded reinsurance which is often provided by foreign insurance companies.
In November 2023 the PRA, the Bank of England’s regulatory arm, said insurers were “increasingly making use of cross-border funded reinsurance arrangements”.
The PRA said this money was coming from abroad and from companies whose origin was not always clear and “who may be more exposed to a range of illiquid investments including through private asset origination capabilities of affiliated alternative asset managers.”
The regulator highlight the use of counterparty risk. In 2008 Lehman Brothers went bankrupt owing $613 billion, this was blamed on its complex exposure to counterparty risk where it was not clear who owned what and where. So complex that it took years to track down, although the money was recovered.
The UK regulator has limited the use of funded reinsurance to £250m per buyout deal in order to protect savers but it said if firms were not doing enough to offset any risks it would consider a further crackdown.
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The PRA said: “The PRA and the Financial Policy Committee have expressed that the current growth in funded reinsurance transactions could, if not properly controlled, lead to a rapid buildup of risks in the sector and have the potential to pose systemic risks.
For example, firms’ current internal investment limits for aggregate exposures appear insufficient to prevent a build-up of systemic risk in view of current activity trends.
“We expect relevant firms to make rapid progress in addressing gaps identified against our expectations, and this will be a priority for our supervisory engagement this year. A funded reinsurance recapture scenario will also be included in the 2025 Life Insurance Stress Test.
“If we consider that firms are not achieving the risk management practices – including prudent limits – needed to mitigate the risks funded reinsurance poses to our objectives, we will consider the further use of our powers to address those risks.”