Greater transparency needed over reinsurance credit risk

Insurers must make their position clear on reinsurance credit risk, according to Pitmans Trustees Limited (PTL), an independent trustee and governance services provider.

Reinsurance credit risk impacts on all pension policies but especially on trust based and contract based defined contribution (DC) schemes, according to PTL.

“If someone takes out a pension policy with an insurer they are protected by the financial services compensation scheme (FSCS).

This protects against the, albeit unlikely, event that the insurer collapses and pension assets are lost,” said Richard Butcher, managing director of PTL.

"However, if, you use one of that insurers external fund links, the individual may not be protected against the collapse of the secondary insurer.

This is because the individual doesn’t have a direct contract with them. "The FSA is consulting on this and would prefer that the primary insurer provides protection.

The alternative is that if they don't, they must then disclose that there is no protection. "The use of third party funds is becoming increasingly common.

We see a lot of this with our trust based and contract based DC clients. For this reason, insurers need to make their position clear quickly.

"Trustees, insurers and members need to understand what compensation mechanisms exist and more importantly, where they are not protected.”