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.
So, the combination of assets held, future asset out-performance and a fall-back onto a surety bond payment, provides a good package.