L&G’s latest insurance product is one designed to cover private sector pension schemes for the extra costs they incur if one of their members takes ill health early retirement. Such events can happen quite often – L&G estimates that a 200 member scheme could expect to have one ill health early retirement every four years.
If that happens, it creates an immediate increase to the pension scheme’s liabilities, which feed straight through to the employer’s balance sheet. Instead, larger employers can now insure against that risk. The L&G plan provides an immediate cash lump sum into the pension scheme to cover the extra cost. A typical claim size can be up to ten times the employee’s annual salary, L&G says.
The plan is aimed at defined benefit (DB) pension schemes with at least 100 active members.
What They Say
Pensions strategy director Adrian Boulding said: “There are fewer employers with these schemes but now is a good time for them to look at this issue. Many are working to reduce and eventually eliminate final salary liabilities on their balance sheet. They may be de-risking the asset side of the scheme, but on the liability side shocks can come along which would knock them off course.”
What We Say
"In not that many years, DB pension schemes have moved from delivering almost embarrassing surpluses year after to year to becoming a funding nightmare for some finance directors. An unexpectedly high number of ill-health early retirements can add considerably to the problem and L&G’s solution is a neat way to crystallise the risk. In effect, the company pays L&G a regular premium to take the financial risk away from the employer.
"This may now be a relatively small market, but it offers a useful solution, as FDs struggle with how best to manage their DB schemes going forward."