Companies Should Take Out Life Insurance Policies for their Pension Schemes

Risk for a pension fund is concentrated on the health of the sponsor.  So, companies should have life insurance policies.  The sad story of how Carillion fell off the cliff is now established and the effects far reaching.  Members will have to see how the Pension Protection Fund haircuts affect them.  What would have helped them was if the scheme was benefitting from a payment out from a life insurance policy or surety bond given to their scheme by their late sponsor.

This can be achieved by a surety bond of fixed amount or better covering the difference between buy-out and current assets held.  Debates over annual pension funding cash contributions can reduce if the scheme’s trustees know they have diversified risk away from just one corporate source.  Long-term, sound investment strategies without excessive derisking can then be maintained.

Banks and insurers are happy to provide guarantees out of company’s borrowing capacity.  It means that, if the worst happens, a sum can be added to the assets of the scheme bringing it closer to buy-out valuations under which members are covered by insurance.  Certainly, most schemes now should be able to get coverage that moves them well above the overall 80 pence in the £ paid out under PPF rules.  

Yet such bonds are rarely seen. Why?  Actuaries and bankers are not on the same wavelength.  Members would benefit from them working more closely together.  
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So, the combination of assets held, future asset out-performance and a fall-back onto a surety bond payment, provides a good package.

Many parents like to leave their UK subsidiaries to deal alone with UK pension funding.  Is this sensible?  Far too often the strength of the parent is ignored.  The cash cost can then be very high and the financial strategy established can fail to address the long-term interests of all stakeholders effectively.  

The call is for parents to get engaged.  Make a direct assessment of how the parent is or could be taken into account.  Remember that The Pensions Regulator statistics show that the sponsor’s covenant makes virtually no different to actuarial calculations.  Yet the pensions industry itself thinks it should and its open to you to ensure that it does.

UK operations can address how to play in the parent to best effect.  A complete guarantee of obligations is not necessary.  But having guarantee with maxima that cover:

• Payments required of the subsidiary
• Solvency of the subsidiary

should change the game.

Then as part of the deal look at:

• The investment return assumed by the scheme – higher for longer
• More onus in recovery plans on investment returns not cash
• No commitment to a secondary funding objective to go beyond the statutory requirement to eliminate a deficit

New actuarial disclosures make it clear how much you are paying in cash for your actuary’s prudence.  But is it necessary?  Is the only answer to derisk until annuities are bought?  What happens if the scheme ends up over-funded?  What about better pensions for today’s employees?

So many international businesses can benefit from asking the right questions and producing better answers for all. C-Suite can help you get stuck in.