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Pension risks can be insulated via cell captive


Cells within incorporated cell captive structures can provide a useful mechanism for the transfer of pension risk to the reinsurance market.

While trustees wishing to use captives to transfer pension longevity risk can set up wholly-owned captives as in the case of the British Telecom Pension Scheme, incorporated cell captives offer a less expensive, ringfenced route to reinsurance markets, experts say.

In theory, they say, trustees of a pension fund could use an existing captive operated by the sponsoring employer of the plan for a pension longevity deal.

However, they say hurdles such as the need for that captive to have a life insurance license and undesirable effects such as the mixing of property/casualty business with potentially much larger longevity liabilities, mean that separate structures are more likely to be used in such deals.

Setting up a standalone captive company likely would be the most expensive way to enter such a transaction, said Stewart McLaughlin, account director at Willis Management (Guernsey) Ltd., while a cell in a protected cell captive likely would be the least costly.

Incorporated cells offer a greater degree of ringfenced protection of the liabilities within the cell and therefore reduce the risk to other cells within the incorporated cell captive than do protected cell captives, experts say.

This is of particular importance given the relative size of the liabilities that may be placed in a captive, before being reinsured, in longevity swap deals.

While longevity risks could be placed through a protected cell, other cells within the protected cell captive may object to such large liabilities being put through the company, experts say, even though that risk then would be reinsured.

Incorporated cell captives were introduced in Guernsey in 2006. In 2010, Malta also introduced rules to allow such captives.

The number of cells within an incorporated cell captive structure is unlimited. Each cell is a separate legal entity, and all of its assets are segregated from other cells. Cells are able to transact with reinsurers, among other things.

The cell captive structure gives “great certainty of segregation,” said Dominic Wheatley, CEO of Guernsey Finance, the promotional agency for the island’s finance industry.

Captive cells can contract with each other, and each cell has its own governance, which gives comfort to the trustees of pension plans and also the owners of other cells, he said.

Using an incorporated cell captive is cheaper than using an intermediary, such as a life insurance company or bank to carry out a pension longevity swap, and setting up a captive cell “can be done in a relatively streamlined way,” said Shelly Beard, a senior consultant at Towers Watson in Bristol, England.

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