Towers Watson, a global professional services company, announced today that it has completed more than $1 billion in transactions for the funding of pension benefits through captive insurance companies. Additionally, experts at Towers Watson expect a growing number of multinationals to express interest in this innovative approach to funding pension benefits, which they developed to help companies better manage the investment and risks of their defined benefit obligations.
Under the approach that Towers Watson created and introduced to the market, a company purchases an insurance policy from a highly rated insurer to meet the benefit obligations of its pension plans. The insurer then reinsures the policy to the company’s captive insurer. While some companies have used captives for multinational pooling and funding life, disability and retiree medical benefits, using captives to fund pension benefits is a new development.
“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, a director at Towers Watson, which has helped the only multinationals to fund their pension plans with captives to date. “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.”
Towers Watson consultants say that funding pensions through captives offers multinationals several advantages, including control over risk management and investments for many non-U.S. pensions, control over stranded pension surplus and potential cost savings.
“Gaining control over the financing of pension liabilities is a major reason why companies are expressing interest in using captives to fund their defined benefit pension plans. This is especially true in Europe, where companies typically have to address pension plan trustees who may have a different view of how to meet the company’s pension obligation than the company itself for each plan in different countries,” said David Finn, a senior consultant in Towers Watson’s London office. “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.”
Paul Kelly, a director in Towers Watson’s London office, commented, “We have been active in assisting multinationals in other aspects of using captives for employee benefits and are excited about their potential for pension benefits. As companies are looking to achieve greater control over the cost and risk of their defined benefit pensions, funding pensions through captives will likely get more attention.”