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Pension Funds

Insurer considerations key in all risk transfer scenarios

Suthan Rajagopalan sees longevity risk as a potential problem that must be addressed.

While the stars are aligning for corporations considering pension risk transfers for their U.K. funds, executives must be mindful of insurers' capacity and patience.

Sources said there are eight insurers in the U.K. bulk annuity market and at least 10 on the reinsurance side. "It is hugely competitive so there's every reason, through a sensible process, a trustee will get good, strong, competitive pricing," said Suthan Rajagopalan, head of longevity reinsurance at Mercer LLC in London.

But there are a number of considerations for corporations, including insurers' deal and resource capacity.

"I think there is almost unlimited capacity for the asset gathering part of bulk annuities. Where they are constrained from a financial risk perspective is longevity risk" due to Solvency II, which requires that insurers hold additional capital or hedge longevity risk on the reinsurance market via a swap, said Mr. Rajagopalan. "Those reinsurers probably have an average annual capacity of 4 billion ($5.5 billion) each, which means we can probably see several years of 40 billion, 2014-style volumes." He added not all of the U.K.'s about 2.5 trillion in DB liabilities will be transferred.

The other constraint is around human capital. "Does each insurer have an infinite number of people to price quotes? Absolutely not. Typically, they are relatively small teams with ultimately volume- and profit-based targets, and (they) have to pick and choose which of the deals meet those targets and are likely to actually close."

The challenge, said Charlie Finch, London-based partner at Lane Clark and Peacock LLP in London, "is not to go out there speculatively, as any speculation will get short shrift."

Mr. Rajagopalan said the market is generally more experienced and therefore there are fewer "fishing trips. And if you are doing that you need to be very open and honest with the insurers so you do not waste goodwill."

Corporations also need to make sure they are prepared in terms of data quality, have realistic price expectations and have a governance process in place that will allow them to see through their derisking journey, he said.