Defined benefit pension schemes are being urged to consider captive-based solutions on the island of Guernsey, as another de-risking option.

Captive-based solutions have been used by schemes such as British Airways, Marsh & McLennan Companies (both 2017), the Merchant Navy Officers Pension Fund (MNOPF) (2015) and BT (2014). Companies create their own insurance company allowing for them to access better pricing, which can give them access to the reinsurance market.

This was done by the MNOPF in 2015, when it hedged £1.5bn of longevity risk, covering over 16,000 pensioners in a deal with Pacific Life Re. The agreement was structured as an insurance agreement between the MNOPF and MNOPF IC Limited, a specially established Guernsey company, and a reinsurance agreement between MNOPF IC Ltd and Pacific Life Re.

Commenting, Guernsey Finance chief executive, Dominic Wheatley, said: “While pension trustees and their advisers have been focusing on longevity risk in recent years, a captive insurance company can do far more. There is a great appetite for reinsurance as it is a suitable solution for many types of risk.

“This is another example of how Guernsey delivers real-world solutions to real-world problems, in this case delivering greater reliability to the long-term financial well-being of millions of pension fund members in communities throughout the UK.

While many predict that up to 40 FTSE 100 companies will have opted for full pension buy-outs by 2028, few have offloaded their schemes in full to insurers, with the total buy-out volume of FTSE 100 companies’ pensions plans only amounting for £5bn out of nearly £800bn in liabilities.

Willis Towers Watson Guernsey director Mike Johns believes Guernsey’s captive-based solutions provide an alternative to buy-ins/outs.

“A Guernsey captive-based solution puts greater operational oversight and control in the hands of pensions trustees and their advisers than any other, while allowing the scheme to retain investment risk. Guernsey is the only proven centre for captive-based longevity risk solutions,” he said. “All recent captive-based pension longevity swaps have chosen the island as a domicile for the special purpose insurer.”

Guernsey’s pedigree in pensions began in longevity de-risking due to it being increasingly affordable and providing access to the reinsurance market, according to Artex Risk Solutions client services director Eddie Ballard.

“Guernsey provides a flexible, responsive regulatory regime outside of the EU,” he said. “Its regime distinguishes between different classes of insurer, between commercial and captive insurers for example, and applies the regulatory regime to each in a proportionate manner. This allows captive owners to gain a direct relationship with the reinsurance market in an increasingly time and cost-efficient manner," Ballard said.

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