Residual risk cover 'not a silver bullet' for pension schemes

Pension schemes have been warned that residual risk cover may not be the “silver bullet” it is sometimes perceived as, after a poll from Sackers revealed that the 55 per cent of pension professionals viewed residual risk cover as a 'must have'.

The poll also found that a further 35 per cent of respondents believe that it is a ‘nice to have’, with Sackers partner, Ralph McClelland, suggesting that this "no surprise" in light of the residual risks that can fall back to the trustee to resolve and potentially finance.

He explained: “As we all know, many defined benefit pension schemes are highly complex. As such discrepancies can, and do, often arise between a member’s legal entitlement and the benefit insured through a buyout."

However, McClelland warned that caution is needed before trustees "race ahead to obtain cover", arguing that "residual risk cover is not the silver bullet that many expect".

"For starters, it’s only currently an option on larger transactions and for some insurers. Even where it is available, there are important differences between the type and level of cover that can be secured," he explained.

“Before pressing ahead with any potential residual risk cover trustees need to be armed with the facts and they need to factor in the insurer’s due diligence process, which itself may be complex, lengthy, and costly.

“Residual risk cover can be very valuable, but we recommend that you ask your scheme lawyer about your scheme’s legal risk profile long before the transaction gets underway to ensure you do not inadvertently open a Pandora’s box.”

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