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I am looking for a pension plan and as part of my investigation, I am checking the credit ratings of the company(eg Moodys). What I am seeing is that the company is having a Baa2 rating. Though the brand name is very strong(at least in Europe). I believe it is better to avoid mentioning the name, according to the T*C's. But I am fine to reveal it as well.

Given that all this story is based in Europe and there are financial worryings across the continent, is it worth continue looking at the company or is the rating too bad? I am not sure I understand what is "moderate risk" exactly.

  • I may be able to answer your question but I don't understand what you mean when you say "pension plan in a company". Could you elaborate? – vic Nov 4 '15 at 14:54
  • @vic, I think you are very right. I meant to say "insurance company". So is it safe to have a pension plan in a company with a strong brand(similar to Allianz or Metlife) but not that good rating(the rating is not bad, it is just lower than it's competitors, but still considered an investment grade) – py_script Nov 5 '15 at 22:12
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The question is still very general, so maybe my answer will be, too. Mind you, even in Europe almost every country has their very own pension scheme.

I think the main question is who is the direct owner of the funds in the pension plan. Is it you, or is it the insurance?

If you are the owner and the insurance just manages the money on your behalf, then all investments on the account that are not directly issued by the insurance would not be affected by a bankruptcy. Example: your pension portfolio consists of a few mutual funds and a note issued by your insurance. Only the latter would be affected.

If, however, the insurance owns the funds and just has an obligation to pay you in the future, all invested funds would be, theoretically, endangered in case the insurance goes bankrupt.

Which brings us to the question of rating. A BBB rating which is still considered investment grade had a long term historical default rate of about 0.3%, or 1 in 300. That's a very low probability. Plus, a default doesn't mean you lose all your money, recovery rates are typically very high with high grade issuers. Here is an interesting article on credit ratings if you wish to know more.

Personally, I wouldn't worry with this kind of risk. But ratings can change. If it drops below investment grade, you might consider switching.

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    another key point is that governments don't like insurers and pension companies failing for political reasons (see AIG) so even in the case of technical default (which is not full bankruptcy) it is likely that either a takeover or a bailout will come into play. – MD-Tech Nov 6 '15 at 12:23
  • Yes. And in many countries there are additional fund protection schemes in place so that even if the pension company fails, employees don't lose their pension (completely). That's why there is no general answer, this is highly regulated territory and will be different from country to country. – vic Nov 6 '15 at 13:32
  • Thanks Vic, your approach sounds relieving. The company is one of the most known brands in europe but had some AIG-like issues the previous decade. The outlooks are stable and the profitability is increasing, so by combining this with your approach, I think I will take it – py_script Nov 8 '15 at 15:05

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