• Transaction by L&G demonstrates that bulk pensions insurance is currently an option for more defined benefit plans than commonly assumed
• Some insurers are willing to lock into 100% cover at the outset for 70% of the premium up front with the balance being spread over up to the following 10 years, says Mercer
Willingness by insurers to accept a spreading of the premium when purchasing bulk pensions insurance is bringing the process into reach of more plans and companies years earlier than they might expect, says Mercer. The comment comes on the back of an announcement on 4 July 2013 by Legal & General that it had completed a bulk pension insurance transaction on this basis with the trustee of Kenwood Pension Scheme. The deal covered 100% of insured benefits from the outset but with a sizeable part of the premium being paid in installments during the following few years.
David Ellis, Mercer’s UK bulk pensions insurance leader, commented, “Spreading part of the premium could be an attractive option for some trustees and employers sponsoring defined benefit plans. It leads to a contribution schedule - to remove the deficit - on which the employer can rely. If you are a trustee or a sponsoring employer, you would be wise to ask whether it is better to fix your plan’s deficit now and put in place an insured contribution schedule to remove that deficit in a defined period, or whether you prefer to rely on future investment returns to reduce plan contributions – both are valid options. As always, what works best for one plan and its sponsor may not be best for a different plan and its sponsor.”
This type of transaction allows a plan’s trustee and sponsoring employer to insure all or part of their plan’s benefit obligations from the outset but without needing to pay the full premium up front. This stabilises the plan’s finances immediately as the long-terms risks borne by the plan and its sponsor – investment returns, long-term interest rates, inflation and longevity – are insured from the outset. The downside is that the trustee and sponsor lock into the deficit based on market conditions at the outset. Many commentators believe that interest rates will rise from their current levels, which will reduce plan deficits for many sponsors – so waiting is an important option to consider.
On the other hand another interesting advantage of this type of transaction over taking out a loan from a third party to cover the deficit is that the insurer does not ultimately insist that the deferred part of the premium is paid in full; if the sponsoring employer is unable to pay, the insurer scales back the insured benefits to compensate.
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