Carlyle Group is exploring how to capture a piece of a multibillion-dollar corner of finance that's changing who writes private-pension checks to millions of retirees.
With workers living longer and markets in flux, employers worldwide are trying to get traditional pensions off their books. They're turning to so-called pension risk transfers — paying insurers to take on their financial obligations to pensioners.
Carlyle is investigating a potential role in the arcane yet burgeoning business and is interested in the U.K. market, people familiar with the matter said. A spokesperson for the Washington-based firm declined to comment.
Carlyle executives are in early talks over the ways it could arrange financial support for insurers that assume pension liabilities, the people said.
Many of these insurers strike deals with other insurers that absorb some of the risks. That's creating an opening for private equity firms to back so-called reinsurers that can take over insurers' obligations.
Carlyle is still studying the market and could opt to stay out of it, the people said. Still, Carlyle's interest reflects private equity's transcendence beyond its buyout roots and into an array of alternative investments.
The firm is angling for deeper ties to insurers in particular, as they could entrust it with new cash. Carlyle raises money to provide financing and is one of the world's biggest managers of collateralized loan obligations. Insurers are turning to such investments for cash streams and hoping that more complex securities can deliver some extra returns along the way.
Carlyle Chief Executive Officer Harvey Schwartz revealed his ambitions in November when he said the firm anticipates "substantial growth" from insurers and expects credit to be "significantly larger over time." It already holds a minority stake in Bermuda reinsurer Fortitude Re, which has $100 billion of assets.
Carlyle isn't expected to create insurance contracts using its own balance sheet. Its top leaders have repeatedly stressed the firm has no desire to become an insurer — or be regulated like one.
Carlyle joins other competitors that are looking at how to play a role in the pension risk transfer market, according to lawyers and Wall Street executives.
The time is ripe for the business, as rising interest rates have reduced the estimated value of future obligations for many pensions. That means many plans currently have enough assets to meet all predicted liabilities, giving employers an opening to offload their obligations without having to put up cash to fill a gap.
Companies in the U.S. struck a record $51.9 billion worth of deals last year involving a key form of pension risk transfer, according to consulting firm Milliman's analysis of data from trade group LIMRA. In a large deal, AT&T Inc. transferred more than $8 billion of pension obligations owed to 96,000 people this year to Apollo Global Management's insurance arm, Athene.
In Britain, where like others Carlyle sees an opportunity, fewer than 10 insurers are seen as ready to absorb pension plans' liabilities as regulation, high capital adequacy requirements and the hefty investment needed in resources make it harder for new players to enter the market.
U.K. insurers have capacity for only £40 billion ($51 billion) to £60 billion a year, according to pension consultants and asset managers. That's a fraction of the assets they'll need to take on in coming years when thousands of U.K. pension plans will likely aim to do these deals.
Insurers need to have an ample cash cushion and convince regulators they won't fail if they absorb these liabilities. Reinsurers that provide capital relief can free up insurers' balance sheets, though increased regulatory scrutiny could stymie their growth.
The Bank of England's Prudential Regulation Authority warned in November that the growth in insurers shipping off liabilities to overseas reinsurers and institutions that made illiquid bets could threaten the stability of the financial system. The regulator expressed concerns over a potentially "rapid build-up of risks in the U.K. life insurance market" and proposed ways for insurers to keep risks in check.
Meanwhile, the U.K.'s Pension Insurance Corp., an insurer and provider of bulk annuities to companies including Walgreens Boots Alliance, is exploring a sale, according to people familiar with the matter cited by another Bloomberg report.
The company has tapped advisers to explore its options, which could also include offering up a minority stake or merging with a rival pension provider, the people said, asking not to be identified discussing nonpublic information. An outright sale could value PIC at more than £5 billion ($6.15 billion), two of the people said.
Reinet, a vehicle backed by billionaire Richemont Chairman Johann Rupert, owns 49.5% of PIC, while HPS Investment Partners, CVC Capital Partners and a subsidiary of Abu Dhabi Investment Authority own another 46% of the company.
Spokespeople for PIC, HPS, CVC and the ADIA declined to comment. Reinet did not immediately respond to a request for comment.
