Expert issues warning over UK pensions as Bank of | European Markets

Aon Investments, a consultancy which has suggested on pension buy outs value over £72bn, has despatched an advisory letter to the CEO’s of UK insurance coverage firms which buy up outlined benefit pension schemes.

The letter urges insurance coverage firms to be clear concerning the use of international money to ‘insure’ the pensions and advantages of the savers whose pensions they ‘buy’.

Final month the Each day Specific revealed that the Financial institution of England had expressed considerations over the growing use of international money to help fund pension buyouts; that is being performed by way of a kind of insurance coverage referred to as funded reinsurance.

The UK’s essential financial regulator has advised insurance coverage firms it will probably foresee an “endemic risk” in utilizing insurance coverage money from international firms to pay out pensions.

In an advisory discover despatched out to insurance coverage firms Gareth Truran, government director and Shoib Khan director, stated there was a risk with this kind of funding and that UK savers could also be inadvertantly uncovered to dangers as a result of of its complexity.

The Financial institution of England didn’t say pension savers money was instantly at risk however did stated it could be preserving a nearer eye on its use and would crackdown on it if mandatory.

This week Martin Chicken, senior accomplice and head of risk settlement at Aon Investments reminded insurers of the need to communciate to pension savers precisely what is occurring with their money.

The letter urged insurance coverage firms to be more transparency relating to the use of funded reinsurance

He stated: “We note the PRA’s (Bank of England regulatory authority) letter to insurers of 9 January 2025 and, more broadly, the significant focus that this topic continues to receive.

“Whereas we recognise that Funded Reinsurance could be a useful gizmo for insurers to allow aggressive pricing and capital effectivity, in addition to forming half of the risk management toolkit, we additionally very a lot assist the PRA’s scrutiny to make sure applicable controls are in place to keep up policyholder safety.

“We also call for increased public disclosure in this area – we view improved market understanding of the benefits and risks associated with this form of reinsurance as beneficial for continued market confidence in the insurance regime.”

Within the letter Chicken additionally urged insurance coverage bosses to be more clear when speaking their inexperienced credentials

“Many our clients are keen to understand better insurer policies and philosophies on ESG matters, such as climate change, social impact reporting and their approach to diversity, equity and inclusion. This is already a core area of focus for clients, and we expect this focus only to grow in future. We would welcome greater transparency, not just on targets and ambitions, but also on actual progress and the tangible actions undertaken to drive better outcomes.

Bird also addressed wider fears that insurance companies may be struggling to deal with the demand of pensions to seek a buyout and that insurers “needed to keep tempo with the growth of business volumes”.

The letter also addressed the issue of illiquid assets. These are assets held by pension schemes which can be worth billions but but often have to be sold off when the pension seeks to be bought by an insurance company.

Selling off the assets, which can include property or long-term investments is expensive for the pension scheme because it can cause delays.

“Aon believes that more innovation is needed on this space, notably for schemes which have reached their endgame sooner than anticipated and are unable to transition to insurance coverage in a cost-effective manner due to the prices and haircuts of unwinding complicated illiquid asset portfolios.”