Can you kindly help me understand this on page 8 of Chapter 29? I thought buying an annuity from an insurance company would reduce liquidity risk as the pension scheme won't have to reserve for the pension anymore and I am confused with the last paragraph. Thank you in advance for you kind help:
"In addition to the relative costs and the variability of those costs, the liquidity risk of retaining the risk or buying reinsurance also needs to be considered in making a decision.
This liquidity risk also arises for pension schemes purchasing insurance. Insurance is to pension schemes as reinsurance is to insurance companies.
For example, the purchase of annuities by a pension scheme may in itself create a liquidity risk for the pension scheme.
The purchase of cover for death-in-service lump sums will, however, remove a potentially significant liquidity risk. This may be particularly important for a pension scheme that is immature or small, as the investment income may be low relative to the death benefits."
"In addition to the relative costs and the variability of those costs, the liquidity risk of retaining the risk or buying reinsurance also needs to be considered in making a decision.
This liquidity risk also arises for pension schemes purchasing insurance. Insurance is to pension schemes as reinsurance is to insurance companies.
For example, the purchase of annuities by a pension scheme may in itself create a liquidity risk for the pension scheme.
The purchase of cover for death-in-service lump sums will, however, remove a potentially significant liquidity risk. This may be particularly important for a pension scheme that is immature or small, as the investment income may be low relative to the death benefits."