The Pensions Regulator's former chairman David Norgrove has launched an insurance company that aims to cut the cost of buyouts by encouraging sponsors to take an equity investment in the initiative...
Long Acre Life estimates it will be able to cut the cost of buyouts from 140% to 120% of liabilities for schemes with liabilities of over £500m.
Buyouts have become an increasingly attractive proposition in the defined benefit market as sponsors look to pass their liabilities onto a third party.
But the insurance initiative - designed by PensionsFirst - said the current buy-out take-up was less than 0.5%, while 10-20% of the market would become interested should the cost drop by 20%.
Norgrove (pictured) said liabilities were becoming a "toxic problem" for companies, but the number being moved off sponsors' balance sheets remained "trivial".
He said: "The current solutions just aren't working. The amounts of money that have been transferred to insurance companies are trivial in comparison to the trillion pounds of liabilities that's out there. So a fresh approach is needed."
PensionsFirst chief executive Timothy Lyons said Long Acre could "unlock" the buyout market. He said there were 290 schemes in the UK that fit the criteria for the new insurer, who hold a total of £750bn of liabilities.
Insurance companies traditionally charge around 140% of the IAS19 liabilities for a buyout, which includes an expected profit to the insurer of around 20% of the liabilities. The insurer then provides around a further 20% of equity, which alongside the expected profit, provides its regulatory capital of around 40.
In the Long Acre Life structure, companies would also pay a buyout premium of around 140% plus 20% by way of an equity investment in Long Acre Life.
Their equity investment would entitle them to the profit traditionally earned by a third party insurer and reduce the cost of buyout from around 140 to around 120.
The profit traditionally returned to the insurer would instead be recycled to the sponsor through dividends and an internal return rate on their investment of between 12 and 15%. This rate will also be used to encourage third-party investors to take a stake in Long Acre.
PensionsFirst anticipates Long Acre to receive authorisation from the FSA early next year.
Source: Professional Pensions