The UK’s Prudential Regulation Authority, a division of the Bank of England, is reported to have begun questioning UK pension insurers and providers over their use of offshore reinsurance to transfer pension risks.
With pension de-risking a top priority for insurers, as pension providers grapple with lower returns and longevity risk, among other issues, offloading some or all of a pension scheme to reinsurers has become increasingly attractive.
The UK’s Times newspaper reported at the weekend that Sam Woods, head of the UK Prudential Regulation Authority, called some of the UK’s largest insurers leaders to meet with him last week.
According to the report, Woods has demanded a significant level of information into reinsurance arrangements that pension providers have entered into.
The regulator understands the need for risk transfer and the fact that reinsurers are able to and have the appetite for assuming pension liabilities from insurers.
The concern lies in pension liabilities being transferred overseas, with reinsurers in offshore domiciles often the recipients of UK pensioners assets, the PRA is concerned that this takes the pension assets outside of its regulation and that should an offshore reinsurer fail would the obligations to the pensioners still be met.
In some cases the risk transfer deals are purely longevity related, so the pensions themselves remain with the UK insurer while a major global reinsurance player takes on the risk associated with pensioners living longer than forecast.
But in other pension risk transfer or de-risking deals, the entire pension pot is transferred to the reinsurer and sometimes the responsibility for administering, investing and ultimately paying the pension then sits with an offshore entity which is outside of the PRA’s sphere of regulatory influence.
The regulator is asking pension insurers and providers to provide details of offshore reinsurance arrangements, so it can understand which countries hold the largest amount of UK pension assets. The PRA also wants to know what plans pension companies have in place for a reinsurer collapse and to understand how risks are being spread across different regulatory jurisdictions.
The UK regulators have actually been monitoring offshore pension risk transfer and reinsurance for some time now in the UK, but finally seems to have zeroed in on cases where full pension liabilities are being transferred to companies outside of its jurisdiction.
The concerns lie in UK pensioners becoming exposed to the failure of an offshore company outside of the PRA’s remit, which could result in pensions being eroded or lost completely while the original provider has no control or means to compensate, having transferred the responsibility for the pensions to another.