Frequently asked questions

Why should trustees consider insurance as an option for removing risk?

Currently, pension fund trustees and their sponsoring companies are faced with a number of issues relating to the management of their pension fund, these include:

• investment volatility
• increasing life expectancy
• changes in pensions regulation
• increased pressure on trustees
• reporting requirements

By transferring the mortality and investment risk, buyout offers a way to resolve these issues.

What are the benefits of buyout for trustees?

Managing risk. Insurance provides trustees with the following:

• greater certainty that payments to members will be met
• ultimate protection for members through the Financial Services Compensation scheme
• removal of mortality and investment risk
• progression to discharge of trustee liability

Reduced operating costs. Economies of scale allow for administration to be managed more efficiently than would be possible for an individual fund. Due to the scale built up by pooling pension funds into an insurance fund additional investment flexibility is also possible. This enables yields to be enhanced over the long term to the benefit of scheme members.

What assistance can Paternoster provide?

Although Paternoster is not currently insuring new pension liabilities on its own balance sheet, we are able to assist trustees in a number of ways.

Utilising our experience of completing 42 trades with an average premium of £65m, we can assist trustees in implementation, transition and contract negotiation. Further we can assist trustees in their analysis of the underlying risk, benefit restructure and preperation of the scheme for buy-out.

Longevity risk transfers. Working with third party providers of capital, Paternoster is currently working with trustees and advisers to design and implement longevity hedges. Where these hedges are executed the risks will ultimately be placed on the balance sheet of an insurer with the financial strength and resources to meet the most exacting of trustees requirements.

What are the benefits of working with Paternoster?

Total focus on defined benefit scheme management. All our people, systems and processes are concentrated on the transfer of defined benefit pension scheme assets and liabilities and the highest level of customer care.

Competitive pricing. Paternoster's cost base and operating is structured to ensure that the minimum cost is incurred in preparing prices and executing transactions.

Flexible solutions. The solutions we provide are designed uniquely for each scheme.

A commitment to customer care. Scheme members transfer automatically to Paternoster and following an initial communication which gives them our full contact details and answers some of their questions they will receive personal benefit statements from us on an annual basis. We work with our partners Jardine Lloyd Thompson to ensure that all our customers' service needs are met. Our UK-based knowledgeable and experienced team is on hand Monday to Friday to answer questions on the phone or via email and post.

What size of scheme does Paternoster provide indicative prices for?

We have the ability to assess and provide indicative prices for schemes of any size, and our involvement is decided on a case by case basis.

What financial security does Paternoster offer?

As well as the money in our asset portfolio that we hold to pay pensions, as a regulated insurer we are also required to hold solvency capital as a prudent allowance in case people live longer, our investments do not perform as we expect or there are unexpected changes in interest rates and inflation over time. The combined value of the assets we hold is always more than the amount we need to pay the pensions - we are closely monitored by the FSA to ensure we comply with this requirement.

We have strong internal governance processes to ensure that risks in the business are properly managed and that business is written on terms which ensure that financial security is preserved for both new and existing pensioners.  These include a pricing and investment committee structure as well as a Board approval process in relation to pension scheme transfer terms and ongoing risk appetite of the business.

How does Paternoster calculate how much it will cost to take on a scheme?

Paternoster completes:

• an evaluation of each individual member's life expectancy
• a yield assumption based on the duration of the liabilities and the current yields available
• The present value of the set up and ongoing administration costs

Will pensioners' policies/entitlements change when a scheme transfers to Paternoster?

A member's benefits will transfer to Paternoster on the terms agreed with the trustees. There would be no further changes to their entitlements following this original agreement.

If life expectancy continues to improve, what will happen if Paternoster finds that it has underestimated mortality and the deficits are bigger than first estimated?

Our team includes an acknowledged expert in mortality (Richard Willets) whose track record shows a consistent prediction of mortality trends ahead of the market. Our approach to mortality pricing uses far greater analysis than is typically the case in the individual annuity market or in the market in general.

What is different about Paternoster's underwriting and approach to mortality?

Typically, the calculations for annuities are based on just three factors: date of birth, gender and the pension amount. Paternoster has improved on these methodologies and uses a significantly broader range of information to construct its pricing model. We are also able to price individual member mortality within each pension scheme.