As of 7 October, the Royal Mail Collective Pension Plan will launch for Royal Mail employees with over a year’s service. It’s an achievement for all involved and is the first time in decades a new style of pension scheme has been launched in the UK. Embracing collective funding and members all sharing in the gains and losses of investment markets, CDC schemes borrow from both traditional DB and DC schemes.
Insurers are favouring funded re as it helps firms manage the market and longevity risks associated with writing bulk purchase annuity (BPA) business by reducing capital charges and therefore making PRT deals more competitive.
Unsurprisingly, given its growth and potential for capital optimisation, UK regulators have been carefully watching the increased use of funded re. In June 2023, the Prudential Regulatory Authority (PRA) sent a “Dear CRO’ letter to heads of risk at UK life insurers.
The letter outlined the regulator’s two main concerns from a sectoral review which it had carried out.
“One of the key risks arising in funded re is that firms recapture sub-optimal portfolios with depressed values and with limited ability to be transformed effectively to the firms’ preferred portfolio,” the PRA letter said.
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