GLOBAL - Towers Watson has completed over $1bn in transactions involving multinationals using their in-house insurance companies to fund pensions, the consultancy said.
The move involves using an outside insurance company to meet the benefit obligations of a defined benefit plan. The insurance company then reinsures the policy to the company's captive insurer - its in-house insurance company.
Companies have traditionally used captives for asset pooling and to fund life and disability benefits, but using them to fund pension benefits is new, officials at Towers Watson said.
"The completion of these pension captive transactions is a watershed event for Towers Watson, as well as for the pensions industry and the overall use of captives for employee benefits," said Mitchell Cole, director at Towers Watson. "We think that the expansion of captives to pensions is an important development in helping companies to rationalize the management of pension liabilities and assets globally."
Global Pensions originally reported multinationals were considering using in-house insurers to pay pension benefits in July. Supporters of the approach say it offers the company more control over their assets since they return to the company fold, reduces costs and provides a fixed annuity for the member. (See related feature: Captives - The reinsurance solution?)
Towers Watson senior consultant David Finn added: "Using this approach, companies are able to consolidate asset management through the captive. Additionally, if a company's investment results are strong, any pension plan surplus can be used by the company rather than having to keep it in the plan."
However, only the largest multinational companies along the lines of those like Coca-Cola, can afford to have their own in-house insurance companies.
In March the soft drink company used its Dublin-based insurer to fund its pension benefits for schemes in Ireland and the UK, and officials said there are plans to use this world-wide if these test-cases prove successful.
Coca-Cola worked with Towers Watson on the transaction.
"This year we completed a transaction that allows us to centralize the risk management of pension risk and investment management of pension assets through a structure that insures benefits locally and reinsures to our captive in Ireland. This new funding format allows us to fully fund and secure our associate's benefits without generating surplus assets to be used outside of Company control. It also provides a centralized mechanism to manage our investment strategies efficiently," said Stacy Apter, senior global benefits consultant at Coca-Cola.
"The plan will initially be tested in the UK and Ireland. Our hope is to eventually roll it out globally."
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