By Ashley Fife From APPLEBY

Bermuda is becoming increasingly attractive as a place to invest pension assets, manage the risks associated with funding pensions, and to carry on a pension trustee business.

In the first instance, pension trustees’ investments in insurance-linked securities (ILS) listed on the Bermuda Stock Exchange (BSX) have been rapidly increasing. ILS include investment contracts known as bonds issued by a special purpose insurer.

The BSX currently lists about one-third of the global catastrophe (CAT) bond market. In Bermuda, pension funds accounted for 14 per cent of all new CAT bonds issued in 2012 — up from zero in 2007.

In the case of CAT bonds, the return an investor receives from holding the bonds is linked to the incidence of a specified catastrophe within a particular period. Depending on the level of principal at risk in any given bond issue, if a catastrophe occurs, all or a portion of the investor’s principal is used by the insurer to pay claims arising from the disaster. If the insured event fails to take place within the predetermined period, the investor earns a good return on their investment.

ILS offer pension trustees investment diversification because their performance is not correlated with the rise and fall of traditional capital markets. They have frequently produced more favourable returns than government and corporate bonds.

CAT bonds enjoyed gains of 12.7 per cent from the end of September 2012 to 6 December 2013 (despite Hurricane Sandy) in comparison to 8.6 per cent for the higher risk junk bonds tracked by Bloomberg Pension during the same period.

Many of the risks of investing in ILS can be managed through diversification of the types of catastrophes and regions covered by the policy.

Amendments to the Bermuda Investment Funds Act 2013 have assisted the efficiency with which ILS can be listed on the BSX. This makes Bermuda more attractive to insurers looking to list ILS as soon as possible in order to obtain an advantage in the market.

The lure of Bermuda for global pension funds does not end with ILS.

Bermuda’s insurance industry is also able to deliver solutions to defined benefit pension funds looking to ensure that they have sufficient funds to pay pensions to retired employees who are living longer.

Bermuda is a market leader in longevity swaps, which can assist pension trustees to manage such funding risk. In a longevity swap, a pension trustee swaps the risk of their variable defined benefit pension obligations for fixed payments from an insurer. One of the most well-known longevity swaps involving Bermuda special purpose insurers was Deutsche Bank’s longevity swap with the trustees of the Rolls-Royce pension fund during 2011.

Bermuda’s captive insurers are also being used to manage funding risk. A captive insurer is an insurer formed by a company with the objective of minimising the costs of its insurance. Many captive insurers are formed for the purpose of providing savings to the company that forms them rather than to generate a profit. More captive insurers are located in Bermuda than anywhere else in the world.

A company may involve its captive insurer in a pension “buy out” transaction. In such a buy-out, an employer and pension trustee transfer the risk associated with funding a defined benefit pension to an insurer, which in turn may enter into a reinsurance agreement with the employer’s captive. The involvement of the captive in this way not only assists employers to minimise the cost of the transaction but also assists the employer’s access to any part of the pension fund not required to satisfy pensions. General Motors used its Bermuda- based captive in its ground-breaking pension buy out during 2012.

In addition to the lure of ILS and Bermuda’s expertise managing pension funding risk, the Island is an attractive jurisdiction to base a pension trustee business.

Bermuda’s proximity to the United States assists pension trustees looking to promote their services to U.S. companies. Bermuda law, based on English trust law and supported by a legal industry with a long and stable history, offers pension trustees flexibility in investment selection that they may not enjoy onshore.

An international pension plan may be unregulated or opt to be registered under the Bermuda Pension Trust Funds Act 1966. In some jurisdictions, registration may facilitate a plan to qualify for tax favoured treatment, therefore assisting beneficiaries of the plan who retire to that jurisdiction.

Legislative change is also making Bermuda more attractive as a jurisdiction.

The Incentives for Jobmakers Act, which came into operation on 17 December 2013, assists employers — including pension trustees — to attract and retain quality staff to drive their businesses forward.

In particular, it makes substantive modifications to the threshold that Bermuda-based companies must meet in order to be eligible for designation as companies that can apply for permanent resident certificates for their executives.

Bermuda is doing all the right things to captivate pension funds and employer sponsors looking for opportunities and solutions.