# How safe are pensions provided by Irish life companies?



## Brendan Burgess (26 Aug 2009)

Many people are dependent on pensions paid by Irish Life and other life insurance companies. But how safe are these companies? Are they independent of the bank with which they are associated? 

This is a very important topic as once one buys an annuity, one is stuck with it. With a unit-linked fund, you could exit if you got worried. 

These are my guesses, but if anyone could fill in the blanks, I would appreciate it.

I presume that annuities are not covered by any government guarantee?

Does the Financial Regulator provide credit worthiness information? 

*Irish Life 
*Irish Life and Permanent Plc has two separate subsidiaries Irish Life Insurance and permanent tsb. If permanent tsb goes to the wall, the separate Irish Life insurance company won't be affected. 

They have called an EGM to separate out the companies completely.

Credit rating: 

*Bank of Ireland/New Ireland
*Bank of Ireland owns Bank of Ireland Life which is a separate company. 

*Hibernian Aviva
*A separate subsidiary of Aviva plc
* 
Zurich/Eagle Star
*A separate subsidiary of Zurich plc*

Standard Life
*A branch of a  quoted UK Plc
This is the only life office covered by the UK compensation scheme.
*

Canada Life 
*Publicly quoted Canadian Plc


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## Duke of Marmalade (26 Aug 2009)

If you own a life assurance policy (be it pension, annuity, unit linked savings, term assurance etc.) you are technically a creditor of the company.

You are therefore exposed to the credit risk of that company. There are no government guarantees and only limited guarantee schemes.

However, life assurance in general is light years away from banking in terms of its risk profile. Banks borrow short and lend long. There is no offsetting linkage between their assets and their liabilities. My deposits have been used to fund somebody's mortgage or indeed speculative development. It is an almost incredibly unsound model but it is what our economy needs. I am not prepared to accept the risks of the mortgage or the speculative development but society needs to channel credit from those who have funds but are risk averse to more or less risky long term propositions.

These days life assurance companies tend to completely de-risk by making the customer accept all the risks of his investments (unit linking). Or in the case of annuities making sure these are mainly backed by sovereign bonds. Asset/liability matching is almost complete in a life assurance context whereas it is practically non existent in banking.

Of course the security of all the life companies cited is completely independent of that of any associated banking relationship.

Can life companies go bust, and have they?

There is always the possibility of massive fraud or gross mismanagement, I don't know of any, but I understand life companies go under in the US quite frequently.

Serious asset/liability mismatching has caused problems but this has been in With Profits contexts where guarantees have been backed by equities or property.

There has been much talk in recent times of the pandemic threat (AIDS being the original of this genre, Swine Flu the latest). (Note that if a company is brought down by a mortality catastrophe it affects all creditors even a pension which may itself be perfectly soundly matched.) Most companies are heavily reassured to very sound global reassurance companies but make no mistake if there was say a Nuclear War most life companies would be insolvent, but would your pension be a high priority in that scenario?

Long post which I want to summarise. Life companies are a completely different kettle of fish from a bank. Nonethess an annuity e.g. does rely on the life company being solvent for the next 30 years whereas a bank deposit is a much shorter commitment. I do know that in these times there is a psychological tendency to see this potential though remote credit risk as another reason for going for an ARF which does not have that risk.


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## Brendan Burgess (26 Aug 2009)

Duke

Thanks for that very comprehensive reply. 



> Of course the security of all the life companies cited is completely independent of that of any associated banking relationship.



I had assumed this, but I wasn't sure. 

While a pandemic would cause serious difficulty in terms of paying out on lives insured, would it not be offset by pensioners dying, so that they would have to pay out fewer pensions? 

Are there public credit ratings for the companies operating in Ireland? How would I know if Canada Life, for example, was subject to some guaranteed annuity problem?


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## Duke of Marmalade (26 Aug 2009)

Brendan,

You are right that there would be some offsetting effects from annuities. But all companies are different. Some have no life assurance, some have no annuities. Pandemic risk is in fact regularly stress tested by the companies and I personally do not think it will ever pose a serious risk to solvency, unlike a Nuke.

I am not aware of ratings for life companies operating in Ireland. Any big parents will have ratings and whilst not directly applicable may indicate the capacity of the parent to bail out a child in distress.

I want to be careful not to alarm AAM readers, personally I think an annuity from any of Ireland's life companies is a much sounder proposition than a pension from many of our leading company DB schemes.


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## Brendan Burgess (27 Aug 2009)

> personally I think an annuity from any of Ireland's life companies is a much sounder proposition than a pension from many of our leading company DB schemes.



Very good point! 

If ratings are not published, does the Financial Regulator publish any information on reserves? Basle II (?) requires the banks to hold certain reserves. How is capital measured in the life insurance companies?  

I find life insurance accounts very difficult to understand, although I have not looked at them for some time.  Is the separate life "balance sheet" available for the likes of Irish Life and Bank of Ireland Life? 

I presume that the life companies are losing money at the moment but that they will return to profitability when the economy picks up.


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## Don_08 (27 Aug 2009)

Most of Irish Life's annuity business is resinsured - so the risk really lies with the reinsurer.  

Agree with the point, an annuity from Irish Life is much safer than a pension from a DB scheme.


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## Brendan Burgess (27 Aug 2009)

Don_08 said:


> Most of Irish Life's annuity business is resinsured - so the risk really lies with the reinsurer.



Hi Don

But isn't my contract with Irish Life? 

Do I need to check the safety of their reinsurers? 

Brendan


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## Don_08 (27 Aug 2009)

Yes the contract is with Irish Life.  The reserves would come under severe pressure if the reinsurer goes bust though.  

If AIG had fallen last year - it would have had severe consequences for a lot of insurance companies.


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## Duke of Marmalade (27 Aug 2009)

Brendan said:


> If ratings are not published, does the Financial Regulator publish any information on reserves? Basle II (?) requires the banks to hold certain reserves. How is capital measured in the life insurance companies?
> 
> I find life insurance accounts very difficult to understand, although I have not looked at them for some time. Is the separate life "balance sheet" available for the likes of Irish Life and Bank of Ireland Life?
> 
> I presume that the life companies are losing money at the moment but that they will return to profitability when the economy picks up.


Lots of questions there but I will try to be brief, using yesterday's ILP interims to illustrate.

Life companies are required to value their liabilities conservatively and to hold tangible assets in excess of these liabilities, that excess has to be at least equal to the Solvency Margin which is calculated by an EU formula. The formula margin for ILAC was €413M and they had €684M excess assets to cover this, that would be a fairly typical ratio. It is not easy to get a list of comparative solvency positions. The fact is nobody in the life business regards them as a differentiating factor. The question of life assurance default just doesn't arise as a competitive issue.

On a "normal" accounting basis ILAC made a profit of €65M in the first half even though, in line with the market, it had a miserable experience both in terms of low new business and policyholders lapsing. However, using Embedded Value which capitalises future margins they made a loss of €75M. 

Irish Life balance sheet is available on-line but whilst other companies' balance sheets are in the public domain you would need to forage for them.


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## Brendan Burgess (27 Aug 2009)

Thanks Duke

I will have a read through the accounts.

The Solvency Margin is the measure I was looking for.


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## Sumatra (31 Aug 2009)

I have seen marketing material produced by life offices which concentrates on both present financial strength and financial outlook.


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## Sumatra (4 Sep 2009)

So who got a rap on the knuckles today then?


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## Brendan Burgess (6 Sep 2009)

I got the following information from Standard Life today: 




> The FSCS [Financial Services Compensation Scheme] provides added peace of mind for you as a policyholder.
> 
> As Standard Life in Ireland operates as a branch of our UK parent company, policies taken out since 1 December 2001 are protected by the FSCS should Standard Life be in default.
> 
> ...


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## z109 (6 Sep 2009)

That's a rather good scheme. Thanks for the info.


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## roker (6 Sep 2009)

Sorry if I am missing the point here? I have an annuity with New Ireland converted from a DB scheme and there must be a lot more than the €2,000 that Is guaranteed. How safe is this?


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## Brendan Burgess (6 Sep 2009)

Hi Roker

You are missing something - a guarantee.

You have no guarantee at all with New Ireland or any other Irish company. No scheme exists for pensions in Ireland.

Brendan


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## roker (6 Sep 2009)

Should this not be a hot political issue? if a person puts a life time of saving/pensions in a system and there is no guarantee.


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## Brendan Burgess (7 Sep 2009)

Guarantees cost money. Either the policyholder or the taxpayer would have to pay for the guarantee. 

The Duke implies that the companies are so safe, that such a guarantee would not be necessary.

Brendan


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## roker (7 Sep 2009)

PMPA went bust in the 80's causing lots of people to loose their pensions, and effected regulation to be put into place, but are they good enough? At present it would imply that the banks are safer than the pension companies because of the guarantee


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## Brendan Burgess (7 Sep 2009)

That is a different issue altogether. 

The employees of PMPA lost their pensions. (I presume that what you say is correct although I don't remember it being an issue at the time.). A lot of defined benefit schemes are in serious deficit and their employees are at huge risk. Waterford Glass is the most recent example. 

My post is about people with defined contribution schemes who buy their annuity from a pension provider. 

Brendan


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## roker (7 Sep 2009)

As far as I can remember not just the employees, a lot of people had pensions invested in PMPA, it was more than a motor insurance company, it caused a hugh backlash forcing legislations which is probably what we have today. I don't know what sort of scheme they had.


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## Bronte (8 Sep 2009)

Didn't Equityable Life go bust in the UK?


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## Brendan Burgess (8 Sep 2009)

No. Equitable Life did not go bust as such.

Equitable Life had commitments to pay very high guaranteed pensions and other products. 

They could not make these high payments, so they had to adjust them.

A lot of people lost out. But they lost out on the difference between a very high pension and a good pension. 

Brendan


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