FSA questions for Pension Corporation

Regulator's letter demands explanation of investments as it takes tough new line

Pension Corporation,a specialist insurer and pension buyout firm run by Edmund Truell, has been told to explain aspects of its investment strategy by the Financial Services Authority (FSA).

A letter was recently sent by the regulator to the parent company, Pension Insurance Corporation (PIC), which manages some £3.3bn worth of assets for around 45,000 people, amid concerns about investments being made on behalf of policyholders. It's believed that PIC has since addressed the issues highlighted.

Sources said that the letter is an indication of the stricter line being taken by the FSA with respect to insurance companies.

"The insurance market got through the recession in better shape than the banks, but there were some close calls behind the scenes," said a source. "The regulator is focusing hard on the sector, in particular those newer businesses in the buyout world. And, of course, the Pearl situation spooked everyone."

Hector Sants, the FSA's chief executive, revealed in November that the regulator had been forced to intervene to help Pearl, the insurance firm which manages funds on behalf of £6.5 million policyholders. "We were concerned to ensure consumers were protected from any disruption arising from weaknesses in the group's financial position," said Mr Sants at the time.

Sources close to PICplayed down the significance of the FSA's letter last week, saying the insurer continues to enjoy an excellent relationship with the regulator. "The letter was issued in the context of regular surveillance," said the source. A PIC spokesman declined to comment.

Pension Corporation said earlier this month that it planned to broaden its investments by upping exposure to riskier real estate and hedge funds. Traditionally, insurance firms have pursued more conservative fixed income and cash-orientated strategies.

In February, PIC issued full year results for 2009, revealing a strong year, in spite of the economic headwinds. It posted a profit of more than £200m with Embedded Value, a key measure of an insurance company's strength, increasing by 50 per cent over the year.

The firm also did a number of high-profile deals last year, including the buy-in of £500m of pension assets run on behalf of the Cadbury pension fund. PIC also completed the buyout of Food From Britain, the first insurance transaction for a public sector-backed pension scheme. And in September last year, it brought in the investment bank JP Morgan to help raise £600m to pursue acquisitions. So far, there has been no announcement as to whether the cash has been raised.

PIC held takeover talks last year with Paternoster, which is currently closed to new business. Since the talks' collapse, it is believed Paternoster has held discussions with Deutsche Bank, which already owns 40 per cent of the firm, about a full buyout.

Analysts expect PIC to float on the London Stock Exchange in the next few years.