Do you want your pension funded from Bermuda?

Bermuda, great for holidays – but would you want your pension funded from here?


The Bank of England’s Prudential Regulatory Authority has written to the Chief Risk Officers of the UK Life Insurers it governs with a warning to look to the way they are funding the buy-out of our funded DB pensions using financial engineering known as reinsurance. Most of the reinsurance market is based in Bermuda.

Put in easier language, what they are worried about is that instead of our pensions being backed by Government bonds and other low-risk financial investments, they are increasingly being backed by promises made from overseas insurers, often based in Bermuda who are outsourcing the risk allowing the UK insurers to make more sales.

Aviva and Just have both used this type of reinsurance lately, the Bank of England is clearly worried as we should be.

You can read the letter here, it is 9 pages long but the key concerns of the PRA are listed on page 3.

Put in easier language;

  1. These reinsurers are untried and untested and could go bust – leaving pensions unpaid
  2. The reinsurers are mixed up in banking rather than life insurance – if there’s a new banking crisis, pensions may go unpaid
  3. The strength of the reinsurer to pay pensions and the strength of the investments made by the insurer are linked – if one goes down , both go down – so pensions may go unpaid
  4. If something goes wrong, there may be nowhere else for UK insurers to go, meaning pensions go unpaid.

Immediate impact

Both the Times and the Financial Times have picked up on the letter. Both see the risk as “systemic”, meaning it could create problems for the wider economy.

Funded reinsurance could create vulnerability and hit UK investment, Bank warns – The Times

“…but it would come at a cost of creating a systemic vulnerability in the form of a concentrated exposure to correlated, credit-focussed reinsurers, and an opportunity cost in the form of UK productive investment foregone”.

Regulator says insurers’ increasing use of ‘funded reinsurance’ risks creating ‘systemic vulnerability’ – Financial Times

relying on reinsurers to help meet a surge in demand for corporate pension deals risked creating a “systemic vulnerability” for the sector and restraining domestic investment.

What this means for insurers

Ever since interest rates and gilt yields rose, employers with defined benefit pension schemes have seen the exit door as “buy-out” with an insurer. Key to this was the security of the member’s pension which would now be subject to insurance rather than investment with the Bank of England standing behind the insurance companies.

This letter spikes that journey. While some insurers have considerable capacity to do their own deals, expansion in the market for secondary players looks like being constrained. The race to buy-out may – for some – have had a false start.

And undoubtedly, this letter – once it has been translated into language that readers of less rarefied publications can understand, will lead to pension scheme members and their representatives, wanting to better understand just who is responsible for paying their and their partner’s pension for up to 50 years.

What this means for pensioners (present and future)

Some would call this a timely intervention on behalf of savers, some might ask why these deals have already taken place and why the warning is coming now and not earlier.

The PRA’s call to action is hardly fearsome

most firms have been keeping their PRA supervisors informed of FundedRe transactions they are entering into and their risk management approach to them.

However, given the volume of the transactions accumulating and the PRA’s interest in understanding the risks arising from such concentration, we would like all firms to notify
their supervisor promptly of individual material9 FundedRe transactions entered into from the date of this letter

For pensioners who are now being paid with money that originated from these reinsurnance deals, there should be some concern, the letter concludes

we see significant potential risks to the PRA’s objectives from the systematic use of FundedRe to meet the increase demand for bulk transfer of defined benefit pension liabilities. The effect
might be to accelerate these transfers in the short run, but it would come at a cost of creating a systemic vulnerability in the form of a concentrated exposure to correlated, credit-focussed reinsurers, and an opportunity cost in the form of UK productive investment foregone.

What this means to the future of pension schemes

For some time, this blog has been calling on trustees and employers to consider alternatives to the buy-out of benefits with insurers. I believe that DB pensions could and should be investing in productive capital and the opportunity cost of sending money to insurers who lose control of it through reinsurance is that our savings are no longer visible. We cannot tell if our money matters – have little oversight of ESG applied and no confidence that the pensions we as taxpayers subsidised, will be doing any public good.

There are alternatives, as the Pensions Regulator made clear in a recent submission to the Work and Pensions Committee. TPR talk of reviving Superfunds, which can invest productively and don’t outsource assets and risk to Bermuda. It also talks of using the PPF as a consolidator. And,  of course,  many pension schemes will continue to pay their own pensions without recourse to consolidation. There are 10.9m of us currently being paid a pension from our employers.

It is very important that these issues are being addressed now and not after the horse has bolted. Well done the PRA for publishing this letter now, let’s hope that the impact of this letter is that our pensions remain invested in and paid by, British organisations, regulated within the perimeter of the PRA, FCA and TPR.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Do you want your pension funded from Bermuda?

  1. Con Keating says:

    There seems to be some confusion as to what is being done here. I have personal and professional ties to Bermuda dating back to the 1960s and early 1970s, and much involvement in the captive and other insurance markets there through until the early 1990s.
    It is important to understand that the beneficiary of a reinsurance policy is not usually the insured, in the case of pensions, scheme members, but rather the beneficiary is the insurance company which has written a policy with the pension scheme. If a reinsurer fails, it is the insurance company which wrote the policy which suffers. It is only if that insurer in turn fails (perhaps as a result of its reinsurance cover failure) that policyholders may suffer.
    I would take little comfort in the presence of the FSCS as backstop for insurers as that is an arrangement which is intrinsically unfunded. Indeed, as Paul Brine of Dalriada Trustees along with Dean Buckner and Kevin Dowd have pointed out, the security of a buy-in or buy-out policy for pensioners may well be inferior to the funded arrangements regulated by TPR.

  2. Adrian Boulding says:

    I think this is the key question to ask any UK insurer operating in the Buy Out market: If their reinsurer failed, would the scale of the losses be light enough to be covered by perhaps cutting the shareholder dividend or would the losses be so heavy as to collapse the UK insurer?

    • Paul Brine says:

      I have asked this question in a live transaction as to the insurer’s current funded reinsurance book and its intentions therefor, and the insurer refused to tell the trustee anything. If we were talking about an asset management contract, and the manager refused to disclose such a core piece of information, that would be a show stopper. But not in an insurance transaction where the service provider appears to set so many terms, including those of disclosure.

  3. Pingback: Truell claims buy-out “reinsurance” is “superfunds through the back-door”. | AgeWage: Making your money work as hard as you do

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