Insurance giant Aegon has covered a shortfall in S.32 buyout policies that provides guaranteed minimum pensions (GMP) of about £270 million.
The S.32 policies, totaling 15,000 in number with an average shortfall of £17,900, were originally issued by Scottish Equitable which was later taken over by Aegon.
The firm had identified the possible deficit in the past and took steps to meet all probable costs to meet its obligation of paying all policies in full. The deficit had arisen out of falling interest rates, greater longevity and fluctuating annuity rates.
Aegon has set already aside 3.8% of its £7.1 billion Scottish Equitable with profits funds to meet any future funding obligation. Spokesman Mark Locke said: “Aegon will ensure that all customers with a GMP receive this valuable benefit”.
Although Aegon has made good for the shortfall, the phenomenon indicates an industry wide problem of GMP deficits of insurance companies.
Thousands of S.32 policies are due to mature in the next 10-20 years and firms are yet to find out the number of policies in force and the associated liabilities. Also terms of payment varies across different companies and IFAs are worried about the industry’s ability to honour due obligations.
“A large proportion of these policies are going to be very expensive for insurance companies to honour”, warned IFA Mark Meldon of RC Grey & Co.