Management Consulting

Companies running defined benefit (DB) pension schemes face the challenge of managing long-term obligations to pay future pensions while navigating regulatory pressures to fund these schemes prudently. As these schemes mature and become better funded, many companies consider transferring their pension liabilities to insurance companies through bulk annuities, which can be costly. An alternative solution is to self-insure through a captive insurance model, allowing companies to avoid high external insurance costs and recover surplus pension assets. The tailored solution involves establishing a pensions captive, which operates as a fronted captive insurance. In this model, the pension scheme's trustees enter into a bulk annuity transaction with a fronting insurer, which then reinsures the pension liabilities to the employer's captive. This structure enables the pension scheme to be wound up while allowing the employer to draw an income stream from the pensions, effectively releasing excess reserves back to the employer as cash. This approach is particularly beneficial for well-funded pension schemes, as it can lead to significant savings compared to traditional insurance market options. Quantifiable results from implementing a pensions captive can be substantial. For instance, it is estimated that pensions managed through a captive can target a release of income of around 20% over the remaining life of a scheme, net of costs. This translates to a potential total income of £100 million for pensions valued at £500 million. The income arises from the release of excess reserves, driven by modest target investment returns and the unwinding of margins as pension liabilities mature. By utilizing a captive, employers gain greater control over their pension schemes, lower running costs, and the ability to access surplus funds more efficiently than through traditional buy-out options.