Strengthening the administration regime for insurers: Sackers’ response
The Government’s consultation on the proposals and draft regulations relating to the strengthening of the administration regime for insurers which were published by HMT on 25 March 2010, are aimed at improving the protection and payment of benefits for holders of insurance contracts where the insurer is facing financial difficulties. In particular, they seek to address gaps in protection that remain in the administration regime for insurers in comparison with the liquidation regime.
We support the proposals to bring the administration regime for insurers into line with that for liquidation.
Similarly, in terms of improving the protection available to pension scheme members, we also welcome the proposal that the requirement to provide assistance to the Financial Services Compensation Scheme (FSCS) should be made an exception to the administrator’s duty to act in the interests of the company’s creditors as a whole (see paragraph 2.12 of the consultation).
We have some comments as to the way in which the proposals may affect occupational and personal pension arrangements and have set these out below.
In this response:
There are several principal areas in which pension schemes may have direct dealings with insurers. These are:
- annuity purchase, for individuals to secure an income stream on retirement;
- linked insurance policies, such as index trackers (for DB schemes) and platform contracts (for defined contribution schemes);
- buy-ins / buy-outs; and
- other insurance contracts, such as longevity insurance or longevity risk transfer agreements.
Buy-ins or buy-outs are a way in which employers and trustees seek to reduce risk in DB occupational pension schemes is by securing members’ benefits with an insurer. This may be done by way of a buy-out, i.e. the bulk purchase of annuities in respect of some (partial) or all (full) of the members of a pension scheme, or a buy-in, where an annuity representing members’ benefits is purchased in the name of the pension scheme trustees.
DB pension schemes could also potentially be affected by changes to the administration regime in relation to the purchase of longevity insurance or longevity risk transfer agreements. Given the increasing popularity of such contacts, the resulting additional security for pension scheme members from the proposed changes would be welcome.
In this context, we agree with the comment made at paragraph 2.19 of the consultation, that under certain arrangements (including retirement annuity contracts and group personal pension schemes), a power to enter into new contracts could be beneficial. This would help enable continuity in the payment of benefits to members and other pension scheme beneficiaries. We therefore support this proposal.
In connection with the power to enter into new contracts, we assume that administrators of insurance companies will be able to convert bulk annuity contracts into individual contracts, as the insurance company will be obliged to convert the policies under existing contracts. This would assist pension scheme trustees who have purchased buy-in policies, and provide additional protection for affected pension scheme members.
We also support the proposal that the administrator should be required to maintain contracts of long-term insurance, providing information to the FSCS, thus keeping in place the arrangements which already exist, should an insurer enter administration. The current situation is of course that the member would only be eligible for limited compensation under the FSCS. The Consultation proposal would provide protection to pensioners and other pension scheme members (both where retirement annuity or buy-out/buy-in contracts have been secured) by permitting pension benefits to continue to be paid in full.