Aegon is launching its first proposition into the pension buyout market with a wind-up funding solution aimed at the smaller end of the market.
Using the Trustee Solutions branch of Aegon, the company says the new solution for closed defined benefit (DB) schemes will allow employers to reduce the risk on scheme liabilities and company balance sheet volatility.
It says it has decided to launch the new solution following its new ability - since 16 October - to provide deferred annuities. As it says although it was previously able to take on DB schemes on a 'bundled' basis - providing administration, investment, and scheme documentation - it now feels it can offer a phased wind-up solution.
The launch follows Aegon’s decision to enter the group annuity market in May, when it said it wanted to fill a gap in the market by concentrating on the lower end of the spectrum in terms of liabilities and the size of the business involved.
While the Pensions Regulator has recently expressed concerns that most of the new entrants to the bulk annuity market, including specialist companies such as Synesis Life and Paternoster, are concentrating on providing solutions for the FTSE 100 companies rather than SMEs.
Aegon claims the ‘Secured Benefits Strategy' will let SMEs buy out their pension liabilities gradually, spreading costs over a period of time by allowing trustees to combine traditional pension investments with deferred annuities in a scheme funding plan for the first time.
It argues the combination of ongoing and wind-up funding provides employers with a flexible scheme specific business plan which lets them wind up the scheme at a controlled pace rather than facing the “cliff edge of deferred annuity purchase in a conventional buyout”.
Aegon says the proposition, which is its first offering in the market using group deferred annuities, will help trustees reduce both investment and longevity risks, as they can secure a set level of guaranteed member benefits using the deferred annuities, which can be increased over time.
The firm also points out the trustees are able to keep control of the remaining scheme investments, with the insurer able to help them manage the risks using an appropriate asset allocation strategy according to membership profile, cash flow and contribution rates.
The insurer says previously these types of solutions were only available to larger firms and on a bespoke basis, but it says as 74% of DB schemes with less than 250 members are closed to new entrants it believes there is a market for a more flexible product for smaller companies.
It says while the solution will be available to all, in the pure deferred annuity market, where schemes are already in wind-up, it will be using a more focused distribution strategy and will be initially working with four consulting actuarial firms with plans to develop wider distribution from the end of 2006.
Colin Beattie, managing director of Aegon Trustee Solutions, says trustees of closed SME DB schemes are currently stuck “between a rock and a hard place” as once they take the decision to close the scheme wind up is inevitable although few can afford a traditional buy out.
He adds: “The market is ripe for innovative ways to reduce and transfer investment and mortality risk and to make the solutions currently only available to large schemes more mainstream. We believe we’ve found a way of giving trustees of SME company schemes both a controlled exit strategy and peace of mind over security of member benefits and ongoing service and administration.”
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