Aon Investments, a consultancy which has advised on pension buy outs worth over £72bn, has sent an advisory letter to the CEO’s of UK insurance companies which buy up defined benefit pension schemes.
The letter urges insurance companies to be transparent about the use of foreign cash to ‘insure’ the pensions and benefits of the savers whose pensions they ‘buy’.
Last month the Daily Express revealed that the Bank of England had expressed concerns over the growing use of foreign cash to help fund pension buyouts; this is being done via a type of insurance known as funded reinsurance.
The UK’s main financial regulator has told insurance companies it can foresee an « endemic risk » in using insurance cash from foreign companies to pay out pensions.
In an advisory notice sent out to insurance companies Gareth Truran, executive director and Shoib Khan director, said there was a risk with this type of funding and that UK savers may be inadvertantly exposed to risks because of its complexity.
The Bank of England did not say pension savers cash was immediately at risk but did said it would be keeping a closer eye on its use and would crackdown on it if necessary.
This week Martin Bird, senior partner and head of risk settlement at Aon Investments reminded insurers of the need to communciate to pension savers exactly what is happening with their cash.
The letter urged insurance companies to be more transparency regarding the use of funded reinsurance.
He said: « 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.
« While we recognise that Funded Reinsurance can be a useful tool for insurers to enable competitive pricing and capital efficiency, as well as forming part of the risk management toolkit, we also very much support the PRA’s scrutiny to ensure appropriate controls are in place to maintain policyholder protection.
« 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. »
In the letter Bird also urged insurance bosses to be more transparent when communicating their green 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 pace 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 in this area, particularly for schemes that have reached their endgame sooner than anticipated and are unable to transition to insurance in a cost-effective way due to the costs and haircuts of unwinding complex illiquid asset portfolios. »
