Too big to fail?
Once a scheme’s assets are transferred to the insurer it no longer comes under the protection of the Pension Protection Fund.
However, insurers are covered by the Financial Services Compensation Scheme, which would be able to step in and support pensioners if the insurance company went bust.
But SPP’s argument is that FSCS protection is contingent on future policy and political appetite.
It says coverage could fall back from 100 per cent if circumstances changed and that meant that if insurers fail, the FSCS may not be able to charge sufficient levies on the sector to cover the funding required.
Hitchiner warns: “Depending on the wider political and socioeconomic context, considering intergenerational inequality, it could be very difficult for a future government to bail out pensioners through financial support to the FSCS.”
Also according to the SPP's research paper, incentive changes are needed to encourage more DB schemes to run on rather than seek a buyout.
The report has therefore recommended prioritising a strong and diversified gilt market, with the argument that allowing DB schemes to run on gilts would enable them to maintain their existing holdings, while a transfer of that capital to insurers could lead to material sales of gilts.
It has also urged the government to strengthen the UK’s position as a leading financial centre, in a way which would create wealth and fund public services in the UK.
The paper states: “Once retirement income is secured, pension schemes’ excess surplus could be deployed over time, and its scope for investment in riskier markets could grow.”
PRA warnings
But SPP’s paper is not the first to express concerns over the surge in buyouts.
In April 2023, the Prudential Regulatory Authority warned UK insurers to exercise moderation when taking on the liabilities of DB schemes.
In a speech at the City’s 20th annual conference on bulk annuities in April, Charlotte Gerken, executive director of insurance supervision at the PRA, expressed concern over the insurance market’s capacity to take on pension scheme liabilities.
At the time, she said the PRA was concerned that insurers were taking on more buyout business and were “expanding their risk appetite, sometimes outside their current core expertise”.
Gerken said insurers "needed to understand how managing interest rates and inflation with vast sums of assets and liabilities may become greater sources or amplifiers of liquidity risk.”
Potential risks around buy-ins, which are also known as bulk annuity purchases, have also been flagged.
In July the PRA published a letter it had sent to chief risk officers at bulk annuity providers (buy-ins) about the use of “funded reinsurance”, which is when an insurer uses a reinsurer, sometimes an overseas one.
