Are insurance companies getting it easy when taking on our pensions?

Pensions Oldie argues that risk management in the pensions world is radically different to that in insurance.

Responding to an article where insurers themselves complain about the arrival of short term private equity money he comments.

I don’t have a lot of knowledge about the insurance industry and its regulation, but I do wonder why it appears not to be regulated in the same way employer sponsored DB pension schemes are regulated – namely against the fundamental assumption that the sponsor will fail!

While Equitable Life was a mutual, it did expose the fact that an insurer could fail at cost to the taxpayer. Could we need a need an insurance equivalent of a Financial Assistance Scheme?

We therefore have to question whether the FSCS would be able to protect the policyholders if a private capital owned insurer was to fail. Would the other FSCS participants be prepared to assume its liabilities in return for a proportionate share of the deficient assets? Could that in turn trigger a systematic risk?

Perhaps we need a Regulator whose first legal duty is to protect the FSCS!

So as a nation we need to question why insurers are not being assessed in the same way as DB funds – are the dedicated assets sufficient to meet the current estimate of the future liabilities. Is the sponsor assessed on its capacity to provide sufficient additional assets to fully fund over a limited time period and legally required to make deficit payments?

Are weaker sponsors required to build the ring fenced dedicated assets to a fully funded level over a shorter period than those more able to make the payments, requiring them to raise additional capital, sell other assets, and forego dividends until the position is rectified?

Would UK insurers still be attractive to private equity investors on this basis?

As another issue, should pension funds invest in private equity vehicles that themselves invest in pension products?

The concentration of risk within pension funds assets should not be increased by investing in more of the same- in my opinion.

We will be having a conversation on this question at 10.00 am on Tuesday 2nd Sept (moved forward for those who want to think about inheritance tax with Steve Webb later that morning).

These warnings are rarely heeded but that does not make them the less important. Thank you Pension Oldie.