Using Captives To Reduce Defined Benefit Pension Scheme Liabilities

20 April 2018

Many well established companies are increasingly finding that their reserves set aside for pension funds are unreliable. This risk is sat firmly on balance sheets unless companies can find a solution.

Meanwhile, the 2008 credit crunch has, it seems, done some serious damage to the current and future longevity of citizens right across the western world (apart from the most wealthy who continue to show strong improvements). In the UK the problem has perhaps been exacerbated by large numbers of new retirements sharing an only gradually increasing NHS budget and therefore inevitably getting less care than their predecessors could have expected. So, with longevity now only improving slowly for occupational pension scheme members, where do longevity swaps stand?

Whilst for bulk annuity pricing mortality trends are secondary to investment opportunities the insurer can find, for a longevity swap we would like to see insurers fully reflect the 2008 to present day experience of higher than expected death rates (as per the CMI16 and 17 surveys).

On the basis that they will do so, Alexandra Gedge from JLT Insurance Management, discusses below how DB pension schemes might consider the use of captives to access reinsurance markets and transfer their defined benefit longevity risk.

PROBLEM

Estimates of global life expectancy have become increasingly erratic in recent years. When you consider this unpredictability and how this affects your company’s pension fund, the results can be at best undesirable and at worst dangerous.

Whilst companies pay apt attention to investment risk, few have focussed enough on longevity risk which is a huge issue.

As of 30 June 2017, the total FTSE 100 pension schemes deficit is estimated to be £46 billion, with 10 FTSE 100 companies having total disclosed pension liabilities greater than their equity market value (Source: JLT).

How The Captive Solution Works

HOW THE CAPTIVE SOLUTION WORKS

By utilising a captive insurance company, you can access reinsurance markets to transfer your liabilities for the pension fund.

You incorporate a cell in an existing Cell Company, then write the insurance from the cell before reinsuring 100% of this into the market.

VALUE

The value comes from having direct access to the reinsurance market, which can provide the best pricing. Meanwhile, using a Cell removes concerns that might exist if a traditional fronting insurer was used for the same role, namely that it could be more difficult to annuitise the liabilities at a future date with a competing bulk annuity insurer.

The process takes the risk off the balance sheet, and can also be done for less money than alternatives. This solution offers a point of access for larger schemes but is still useful for smaller schemes as it can be a simplified process.

ISOSCELES

JLT Insurance Management offers Cell captive solutions for clients through our owned and managed vehicles (Isosceles) in Barbados, Bermuda, Guernsey and Vermont. Our first Isosceles Company was established over 20 years ago. Isosceles allows for protected cells.

An organisation effectively rents a cell with the Cell Captive, enabling it to manage its risks and transfer liabilities into the reinsurance market through a Captive programme without establishing a subsidiary insurance company.

Each Cell provides a legal separation of each Cells’ assets and liabilities from those of other Cells in the Cell Captive facility. Cell companies are often used for bespoke insurance contracts and can help an organisation gain access to reinsurance markets. They can also bridge the gap between insurance solutions and capital markets - otherwise known as capital market risk transformation.

For more information on how Captives could be used by your pension scheme, contact Alexandra Gedge, Business Development & Captives Executive, JLT Insurance Management – Alexandra_gedge@jltgroup.com. or Harry Harper, Head of Buy-in/ Buyout Services, JLT Employee Benefits – harry_harper@jltgroup.com.

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