April 23, 2018 / 6:26 AM / 6 months ago

Europe's pension problem spurs return of veteran investors

LONDON (Reuters) - British pensions specialist Clive Cowdery has raised $2 billion in commitments from investors for a new fund to buy up life insurance policies from companies struggling to make enough money to cover long-term payouts, sources told Reuters.

FILE PHOTO: A group of elderly people sit in the shade in a park in Vienna, Austria June 28, 2017. REUTERS/Leonhard Foeger/File Photo

The fund is one of a series of new ventures designed to capitalize on the difficulty life insurers and company pension schemes face in generating the returns required in an environment of low interest rates and tougher capital rules.

Besides Cowdery’s fund, the newly formed European Insurance Consolidation Group (EICG) is also looking for life insurance deals while pensions veteran Edi Truell and fund Clara Pensions both plan to take on defined benefit schemes from British firms.

Specialist providers say they can run pensions and life policies at a lower cost by using economies of scale, investing more astutely and using actuarial expertise to match assets more closely to liabilities - and thereby reduce risk.

Cowdery, founder of The Resolution Group, one of UK life insurance’s biggest names, will be focusing on life insurance policies closed to new customers in continental Europe and the United States, three sources told Reuters.

Cowdery declined to comment.

EICG director Jurgen Schweigert, who is a former Resolution executive, said there were a number of life insurance policy portfolios up for sale, including two books in southern Europe with about 5 billion euros ($6.1 billion) in assets.

“There is a lot of capital out there chasing this opportunity,” Schweigert told Reuters, declining to give more details about any of the assets on offer.

Existing insurance entities backed by private equity firms Apollo and Cinven are also vying for Italian insurer Generali’s (GASI.MI) 43 billion euros of German life insurance business, banking sources told Reuters.

FILE PHOTO: A man walks behind a boy in a park in Brussels, Belgium June 27, 2017. REUTERS/Eric Vidal/File Photo

Generali declined to comment.

British insurer Prudential (PRU.L) sold 12 billion pounds ($16.8 billion) of closed annuities books this year to Rothesay Life and market sources estimate there are about 100 billion pounds of such portfolios available in Britain. [nL8N1QW1BN]

PENSION SUPERFUND

Some large insurers have pulled out of offering costly pensions in Britain, or the rest of Europe, to focus on growth areas - such as Asia, in the case of Prudential.

In Britain, companies are starting to transfer pension schemes calculated on workers’ final salaries to insurers, to take the pensions risk off their balance sheets.

Such schemes, which guarantee a fixed payment to pensioners, have been closed by many companies because of their cost but still have a collective deficit of 116 billion pounds.

Truell, co-founder of the firm which became specialist annuity provider Pension Insurance Corporation, is one of the backers of The Pension Superfund, a new venture designed to manage British company pension schemes.

The superfund is capitalizing on British proposals allowing for the consolidation of company pension funds to make them cheaper to manage. [nL8N1R13MP]

The fund also comes under Britain’s pensions regulator, rather than the Prudential Regulation Authority for banks and insurers. Capital costs for insurers offering pensions have risen due to Europe’s tougher Solvency II rules.

Truell told Reuters the structure of the superfund would give it greater freedom to allocate assets than an insurer because it won’t face their regulatory costs and could invest more easily in higher-yielding assets, such as infrastructure.

The Pension Superfund will, however, face competition from at least two other similar funds looking to take on British company pension schemes, including Clara Pensions, sources said.

Clara Pension’s co-founder Kim Toker declined to comment.

BULK ANNUITIES

The Pension Superfund model provides a cheaper alternative to the bulk annuity model that has been in vogue in recent years, Truell said.

Insurers, however, argue their high capital requirements make pension payments through a bulk annuity more secure than the pension consolidation fund approach being adopted by the Superfund and other new players.

In a bulk annuity arrangement, an insurer takes over the risk of a defined benefit company pension scheme, also known as a final salary scheme.

The bulk annuity market is relatively small compared with the two trillion pounds of liabilities in company pension plans. Schemes which are heavily in deficit find it hard to pay the insurance premium required for a bulk annuity.

However, ratings agency Fitch described it as one of the few life insurance sectors with significant growth prospects, even though barriers to entry are high because of the capital costs and specialist skills needed.

Advisory company Willis Towers Watson (WLTW.O) estimates the market will total 15 billion pounds in premiums in 2018, up from an average 10 billion to 12 billion in recent years.

The UK bulk annuity market is also attracting new entrants.

Insurers Canada Life, Phoenix Group (PHNX.L) and Scottish Widows have all entered the market in the last couple of years, bringing the number of players in the United Kingdom to eight.

But industry sources expect new entrants in 2018, including one firm backed by venture capital which has plans to insure smaller company schemes. The sources declined to name the firm.

Additional reporting by Paulina Duran in Sydney and Arno Schuetze in Frankfurt; editing by David Clarke

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