Donald Fleming

Written by: Donald Fleming

Donald Fleming


Insurers are all the same…aren’t they?

  • November 2019
  • 3 minutes

A rather technical corner of the pensions world has recently highlighted a more general issue: how far do we need to ‘look behind the curtain’ at what a financial regulator does? 

In recent years, many final salary pension schemes have switched their investments into annuities issued by insurance companies. These annuities are designed to match, as closely as possible, the pension schemes’ liabilities to pay member benefits. 

When only some of the liabilities are switched, it is known as a ‘bulk annuity buy-in’. Members will likely not notice any change and the sponsoring employer remains ultimately responsible to support member benefits. The ‘end game’ for an increasing number of schemes is to ‘buyout’ the liabilities: to switch all their investments into exactly matching annuities and for the insurance company to take over lead responsibility to pay pensions. At this point members may be surprised to learn that they are being paid their pensions by an insurance company rather than the company they worked for years ago. The employer ‘covenant’ is effectively replaced by the close watch of the financial regulators. 

Insurers are heavily regulated in the UK by the Prudential Regulation Authority (PRA), part of the Bank of England, which regulates insurer capital and by the Financial Conduct Authority (FCA) which regulates how the insurer conducts its business. 

So, while some pension trustees have carried out high level due diligence on buy-ins and buyouts, it has been a fairly level playing field for insurers - as long as they are suitably regulated then it is essentially about price; nevertheless, the reason that pricing differs is because insurers each have slightly different business models, levels of risk capital to support the business, and profit margins. 

In a recent High Court case which concerned a transfer between insurers of a book of annuities, the judge took the highly unusual step of blocking the transfer and suggested that it was relevant to look behind the curtain. According to reports, despite neither the FCA nor PRA objecting to the transfer, the judge thought that policyholder documents did not contemplate that annuities might be transferred to another firm; interestingly he also drew a comparison between the firms’ ability to draw on additional capital and their respective heritage in the market. 

We must be careful not to draw general conclusions from a case which concerned the facts of an annuity transfer between insurers and which will likely be litigated further; but the financial crisis was surely an object lesson in ‘don’t assume’. The more specific lesson for pension trustees is surely that it is not enough just to rely on a regulator which has a different set of objectives or capabilities. 

Independent assessment and due diligence should be part of any major transactional process – and this lesson will apply not just for annuity buy-ins and buyouts but also to master trust and, in due course, superfund pension scheme consolidation. 

For more information, please contact Donald Fleming