Our recent research based on relative performance of investment portfolios shows no concerns over the long-term target investment strategy adopted by the consolidator we studied.
The results of our modelling indicate that this portfolio is expected to be more resilient than that of a typical insurer portfolio to a range of scenario tests. This is largely because of Solvency II and the impact that the inclusion of HY credit has on portfolio efficiency. It shows that from a starting position of 100% funded, the portfolio has lower volatility and performs better after a shock to the asset portfolio.
- Funding Ratio at Risk (assuming a 100% funded starting position) is 7.5% in the PSF portfolio, against 8.5% in a model insurer portfolio
- After a 2008 shock scenario, the funding ratio of assets to liabilities would have reduced by 12.8% in the consolidator portfolio, against 25.3% in a model insurer portfolio
- In a 99.5% market shock situation, the funding position of the consolidator would be expected to worsen by 16.3%, against a model portfolio where the notional funding position worsens by 17.6%
However, the relevant investment portfolio performance doesn’t mean consolidators are more secure than investment companies. There are a number of key drivers which influence security and anyone considering the security of consolidators should also look at:
- The actual reserves held to back liabilities (insurers will typically hold a much higher level of reserve capital than the Solvency Capital Requirement)
- The mechanism for capital release to investors in a consolidator fund
- The scale of the consolidators vs. insurers and ability to diversify risk across more lives in insurance companies
- The re-insurance policies of the two different solutions
- The regulatory regime that the two different solutions operate under
Ultimately, we think consolidators could represent an option which significantly improves outcomes for members, depending on the covenant of the current sponsoring employer. The choice of a transfer to a consolidator, an insurer, or indeed remaining on the sponsor balance sheet should be one which each trustee board considers in light of their own particular circumstances and objectives.
It is important that, as an advisory community, covenant, legal, investment and funding advisors bring all angles together to help trustees consider what is a very nuanced and multi-faceted decision.
Click here to view research from our Consolidator and Insurer Investment Portfolio Study.