About us 
What we do
In the UK, defined benefit pension schemes were traditionally set up by employers who wanted to ensure that their employees were able to earn a pension that would allow them to retire with enough income to maintain their standard of living.
Employers set these schemes up voluntarily and created pensions trusts, with boards of trustees, to hold and manage the assets needed to meet these obligations.
Over time the scale and cost of these obligations has gown materially such that it is not uncommon for the defined benefit scheme to be larger than the employer it is associated with. It is now common practice for both associated employer and Trustees to explore and implement strategies which –
In 2006 a number of new insurance companies created competition and innovative solutions which were appealing to schemes with solvent employers.
Since 2006 Paternoster has been selected by 42 Boards of Trustees for the provision of buy-in/buy-out solutions.
In April2009 Paternoster took the decision to stop writing new contracts of insurance, effectively preserving capital resources for the existing policyholders.
The market for buy-in/buy-out has slowed significantly in 2009 with far fewer schemes transferring all their risks to insurance companies. However, the desire amongst trustees and sponsoring employers to transfer risk still remains. This has manifested itself in investment risk and longevity risk being decoupled and a market emerging for longevity risk transfer only. Paternoster is working with third party capital providers to offer these solutions to pension schemes.
A bulk annuity policy (buy-in)
A bulk annuity policy insures the defined benefit pension scheme in part or in its entirety. The assets of the scheme relating to the element being insured are transferred to the insurer (often accompanied by a top up payment from the sponsoring employer), who then provides an amount to the trustees on agreed dates equal to the value of the pension payments due. In other words, the insurer is responsible for giving the trustees the income they need to pay the pensions.
In this instance the administration of the pension scheme is often retained by the trustees, meaning that scheme members will continue to receive communications and/or payments from their current scheme administrators. It is possible under these arrangements to transfer administration to the insurance company.
Once the contract between the insurer and the trustees has been agreed the scheme members’ benefits will stay the same, including for deferred members, the options available to them (e.g. early retirement or transfer out of the scheme).
Individual annuity policies (buy-out)
The issuance of individual policies directly to scheme members usually takes place towards the end of the process of winding up a pension scheme. Once individual policies have been issued the scheme members’ pension benefits are insured directly with an insurer, members are no longer a member of the original scheme and the liabilities no longer reside on the sponsoring employers’ balance sheet.
Where the member receiving the policy is a deferred scheme member then their policy entitles them to a ‘deferred annuity’. This means that they will receive an income directly from the insurer when they retire. The amount that they will get will be based on their pension benefit entitlement at the date they left their company pension scheme.
Pensioners with an individual policy are entitled to an annuity.
Longevity hedge
A defined benefit pension scheme is exposed to a number of risks which are ultimately borne by the sponsoring employer. These risks include investment, inflation, interest rates and longevity risk.
Trustees and sponsors have, for a number of years, had solutions available to them to assist in the management of inflation, interest and investment risk. Recent developments have seen the introduction of longevity hedges. A longevity hedge sees the insurer prescribe a set of payments to be made by the pension scheme which represent the expected cash flows to the scheme membership. If over time payments to members exceed the prescribed payments then the insurer makes good any difference. If payments are less than as prescribed the scheme pays the insurance company the difference between the actual payment and the prescribed payments.
The hedge offers the ability to convert the policy to bulk annuity policy at a later date.
Advantages for scheme members
There are several advantages of transferring to an insurer for scheme members:
- they are no longer dependant on the ability (or otherwise) of the company to fund the liabilities (i.e. pay their pensions)
- the insurer will understand pension risks better and therefore be able to manage the pension promises more efficiently and effectively
- the promise to pay pensions is supported by prudent reserving, solvency capital, a conservative investment strategy and a regulatory framework overseen by the Financial Services Authority.
A pension scheme with a corporate sponsor has no such protections or oversights.
Employers set these schemes up voluntarily and created pensions trusts, with boards of trustees, to hold and manage the assets needed to meet these obligations.
Over time the scale and cost of these obligations has gown materially such that it is not uncommon for the defined benefit scheme to be larger than the employer it is associated with. It is now common practice for both associated employer and Trustees to explore and implement strategies which –
- slow the accumulation of further obligations;
- cease further accumulation altogether; or
- transfer risk embedded in the scheme to other more willing recipients of the risks
In 2006 a number of new insurance companies created competition and innovative solutions which were appealing to schemes with solvent employers.
Since 2006 Paternoster has been selected by 42 Boards of Trustees for the provision of buy-in/buy-out solutions.
In April2009 Paternoster took the decision to stop writing new contracts of insurance, effectively preserving capital resources for the existing policyholders.
The market for buy-in/buy-out has slowed significantly in 2009 with far fewer schemes transferring all their risks to insurance companies. However, the desire amongst trustees and sponsoring employers to transfer risk still remains. This has manifested itself in investment risk and longevity risk being decoupled and a market emerging for longevity risk transfer only. Paternoster is working with third party capital providers to offer these solutions to pension schemes.
A bulk annuity policy (buy-in)
A bulk annuity policy insures the defined benefit pension scheme in part or in its entirety. The assets of the scheme relating to the element being insured are transferred to the insurer (often accompanied by a top up payment from the sponsoring employer), who then provides an amount to the trustees on agreed dates equal to the value of the pension payments due. In other words, the insurer is responsible for giving the trustees the income they need to pay the pensions.
In this instance the administration of the pension scheme is often retained by the trustees, meaning that scheme members will continue to receive communications and/or payments from their current scheme administrators. It is possible under these arrangements to transfer administration to the insurance company.
Once the contract between the insurer and the trustees has been agreed the scheme members’ benefits will stay the same, including for deferred members, the options available to them (e.g. early retirement or transfer out of the scheme).
Individual annuity policies (buy-out)
The issuance of individual policies directly to scheme members usually takes place towards the end of the process of winding up a pension scheme. Once individual policies have been issued the scheme members’ pension benefits are insured directly with an insurer, members are no longer a member of the original scheme and the liabilities no longer reside on the sponsoring employers’ balance sheet.
Where the member receiving the policy is a deferred scheme member then their policy entitles them to a ‘deferred annuity’. This means that they will receive an income directly from the insurer when they retire. The amount that they will get will be based on their pension benefit entitlement at the date they left their company pension scheme.
Pensioners with an individual policy are entitled to an annuity.
Longevity hedge
A defined benefit pension scheme is exposed to a number of risks which are ultimately borne by the sponsoring employer. These risks include investment, inflation, interest rates and longevity risk.
Trustees and sponsors have, for a number of years, had solutions available to them to assist in the management of inflation, interest and investment risk. Recent developments have seen the introduction of longevity hedges. A longevity hedge sees the insurer prescribe a set of payments to be made by the pension scheme which represent the expected cash flows to the scheme membership. If over time payments to members exceed the prescribed payments then the insurer makes good any difference. If payments are less than as prescribed the scheme pays the insurance company the difference between the actual payment and the prescribed payments.
The hedge offers the ability to convert the policy to bulk annuity policy at a later date.
Advantages for scheme members
There are several advantages of transferring to an insurer for scheme members:
- they are no longer dependant on the ability (or otherwise) of the company to fund the liabilities (i.e. pay their pensions)
- the insurer will understand pension risks better and therefore be able to manage the pension promises more efficiently and effectively
- the promise to pay pensions is supported by prudent reserving, solvency capital, a conservative investment strategy and a regulatory framework overseen by the Financial Services Authority.
A pension scheme with a corporate sponsor has no such protections or oversights.
