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Covenant risk solutions

As trustees progress in their journey to improve their funding levels and start thinking about transferring the economic risk to another party, so counterparty risk becomes a key risk factor. Historically, this journey has generally ended with a decision to enter into an insurance policy with a regulated insurer, which in effect transfers the economic risk from the scheme and from the sponsor through the covenant to the insurance company. Our unique approach enables trustees to directly compare insurers across a range of key risk factors.

What is counterparty risk?

Counterparty risk is the risk of an insurance company failing to keep its promise to deliver member benefits in full.


There are currently eight insurers active in the UK’s BPA (bulk purchase annuities) market. As with all insurance products, bulk annuity policies offer a trade-off between the premium paid and the level of protection received. One of the most important decisions for pension scheme trustees is selecting one of the eight active BPA insurers to transact with. An assessment of counterparty risk is absolutely vital in this connection.

Advisory services for pension schemes - poles in water

Trade-offs between price and security

Although Solvency II (the prudential regime for insurance and reinsurance undertakings in the EU) has introduced a new standard risk governance framework and reporting structure for European insurers, they retain flexibility in areas that shape their risk profile. That’s why no two insurers offer the same risk profile to their policyholders. This position has been reaffirmed in the UK through case law.


As a trustee, you will want to demonstrate that you have considered the trade-offs between price and security – after all, the insurer offering the cheapest quote may not necessarily be the most secure or robust. A timely assessment enables both trustees and sponsors to take strategic decisions on the basis of security-relevant considerations, paving the way for a more smooth and cost-effective de-risking process.

Key questions in your decision-making process

  • How does the insurer’s overall risk profile compare with its competitors?
  • Is the transaction affordable? In other words, what will the insurer’s capital position look like post-transaction?
  • Are there any material areas of concern which could threaten the insurer’s ability to meet its obligations to policyholders in full?

Helping you choose your destination

  • We can help you as a trustee to decide which path you want to take: do you want to go down the insurance route, or would you prefer to hedge your longevity? Or would you prefer to keep running the scheme?
  • The market has traditionally been fairly sleepy, but new solutions are now opening up. Insurance is still the default choice, but there are now other options, such as superfunds, which operate on the premise that they are slightly cheaper.
  • Our focus in our work for trustees is on the security provided by insurance companies, i.e. comparing insurer A with insurer B. We can help you think about why to choose one over the other.
  • In our work for sponsors, we can help you to develop and execute a strategy.
  • We can advise on buy-ins, buy-outs and longevity swaps, which are all becoming increasingly important components of a pension scheme’s toolkit.
  • If your scheme is considering a transfer to a consolidator, we can give you clear guidance on factors you will need to consider.

Our approach is built on three pillars

  • We have developed an approach that is the most comprehensive in the market.
  • We enable you to directly compare insurers across a range of key risk factors.
  • We provide clear advice by cutting through insurance industry jargon