UK - Pension trustees and employers could leave themselves critically exposed financially if they do not address a trend by life companies to cap their total exposure to death-in-service benefits.
Insurance provider AIG Europe (UK) is urging HR directors and pension trustees to examine their scheme’s exposure on the back of an increasing number of companies moving to cap their liability in the event of a major catastrophe killing a large number of employees.
AIG says in such situations, employers could be left with “significant financial exposure” of millions of pounds and the trustees could be in breach of their statutory duty of care.
Pension funds provide death-in-service benefits designed to deal with individual cases of accidental or natural death. AIG said as life companies place limits on the amount they will provide to pension funds to cover their liability, companies with a large number of employees in locations vulnerable to catastrophe could face a claim for benefits in excess of the cap, which is usually set between £35 and £50m.
“Furthermore, if there is a shortfall, there is a real likelihood that the employer will need to fund the difference, resulting in a major strain on the company’s financial position,” AIG noted. “In addition pension fund trustees could possibly be held to account for not maintaining sufficient protection.”
Guy Wilson, UK manager for group personal accident at AIG Europe, said: “We are urging all HR directors and trustees to undertake a thorough review of their company’s pension plan. Any company that has large numbers of employees in vulnerable locations, or indeed that could be directly a target of attack should ensure that they have full indemnity for their obligations to employees.”
He continued: “Take a city institution based in Canary Wharf, with 500 employees on a single site with an average salary of £50,000. Typically death-in-service benefit will amount to four times salary or in this case £200,000 per individual. On that one city site alone there could be an exposure of £100m.”
AIG said the current trend is for life insurance companies to cap the total amount they will pay following an incident at about £35m, requiring cover of £65m over the capped amount.
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