Carey Olsen
In the wake of the recent $16 billion transaction, Carey Olsen partner Konrad Friedlaender explains the nuts and bolts of the BTPS Insurance Incorporated Cell Company...
How and why did Carey Olsen get involved with the establishment of the BT Pension Scheme’s captive?
The trustees of the BT Pension Scheme (BTPS), after identifying the opportunity to protect the scheme from the longevity risks inherent in a defined benefit pension scheme, considered various jurisdictions for the establishment of the captive insurer. It chose Guernsey as the most appropriate given its well-developed captive industry, the insurance expertise found on the island and the suitability of the jurisdiction to reinsure into the international reinsurance market.
Carey Olsen has a great deal of experience in establishing captives and reinsurance and we believe this is the reason we were instructed, though it is probably a question that is probably best asked of the trustees.
What did Carey Olsen do to assist the captive?
We provided all the Guernsey legal advice relevant to the project including all aspects relating to the establishment of the captive insurer, its engagement of managers and advisers generally and its licensing and regulatory approval in conjunction with the managers.
We also provided advice to the trustees and the board of the captive on all Guernsey issues relevant to the insurance and reinsurance contracts and the related security arrangements of a very complex transaction. Throughout the transaction we provided opinions on the Guernsey legal issues and coordinated the transactional arrangements through to completion.
How much bigger was this transaction (at $16 billion) than those before it? Is it likely to stay at the top for some time?
There are not many defined benefit schemes of the size of the BTPS and consequently it is unlikely that there will be other transactions of this size and nature that would challenge the size of the BTPS transaction. Transactions of this nature are not generally in the public domain (other than the Aviva Scheme, which has had some publicity with a stated value of around £4 million) so it is difficult to say to what extent it dwarfed other such transactions. However, it can fairly be assumed that it is unlikely that there are any other schemes of this size or complexity in this part of the world at least.
What are the characteristics of a longevity insurance/reinsurance transaction?
The good news that we can all expect to live longer than our parents, and that life expectancy is constantly increasing, has a flip side in that longer lives, without commensurately delayed retirement ages, increases the post-retirement life expectancy and therefore the burden it places on defined benefit pension schemes that provide guaranteed life-long pensions to their members.
This increased risk is made more difficult to plan and prepare for due to the uncertainty inherent in the longevity risk. It not possible to remove that risk entirely but it is possible to create some parameters and a degree of certainty or foreseeability by ceding the risk to insurers and reinsurers.
In effect, the trustees transfer some of the risk to the insurer by the insurer and the reinsurer. Premiums are fixed based on actuarial calculations having regard to data relevant to the scheme. As mortality rates change over time, the insured benefits change so that if mortality increases then insured benefits decrease, and if mortality decreases then insured benefits increase. This creates more certainty and enables the trustees to plan and prepare for the scheme’s ability to meet future pension obligations.
What regulatory issues are important to consider during such a transaction?
The regulatory issues were complex and multi-jurisdictional in that the transaction involved regulatory considerations in the UK, where the BTPS is established, Guernsey, where the captive insurer is situated, and the US, where the reinsurer, Prudential, conducts its business.
In Guernsey, some of the regulatory issues to contend with are related to the control of the captive, possible oversight by Prudential, capital resources, solvency margins, reinsurance cover, the matching of cash-flow to and from the captive, policyholder protection, corporate governance and risk assessment, among others.
Do you have any insight into the functions of the BTPS Insurance Incorporated Cell Company?
The principal and overriding function of the cell, which is structured as an incorporated vell vompany, is to insure the longevity risk in respect of 25 percent of the risk to which the scheme is subject. In order to do so it has entered into an insurance agreement with the trustees of the scheme in respect of that risk and it has, in turn, reinsured that risk to Prudential via a reinsurance agreement.
These insurance and reinsurance arrangements are linked into a complex arrangement to establish collateral security and triparty arrangements to protect the respective parties against counterparty risk. BTPS, through its cell, will manage that arrangement on an ongoing basis.
