Pension risk transfer

An insurance buy-in transaction involves purchasing a policy from an insurance company that matches the benefits due from the pension scheme. This policy is held as an asset of the scheme and provides a regular income to the scheme to cover the benefit payments that need to be made to members. It is a step towards eventually buying out the benefits completely with the insurance company ahead of winding up the scheme.

Pension scheme trustees may choose to “buy-out” some or all of their scheme’s expected future benefit payments by purchasing a bulk (ie one covering many individuals) annuity contract from an insurance company. The insurer then becomes responsible for meeting pension benefits due to scheme members (effected ultimately by allocating an individual annuity contract to each scheme member). Following a full buy-out, (ie one covering all scheme members) and having discharged all of the trustees’ liabilities, the pension scheme would normally be wound up.

Moving a scheme to wind-up is a complex process involving a number of interdependent workstreams and requires a thorough understanding of the processes involved. Key trustee steps to help ensure a seamless transition are:

• Agreeing clear project plans, budgets and regular reporting with all parties to ensure a smooth move to wind-up.
• Drawing on experienced project management support to help navigate the many interdependent workstreams.
• Obtaining practical advice from experienced specialists on technical areas and common issues.
• Initiating early discussions with the sponsor to ensure robust trustee protections at the end of the wind-up process.

A pension scheme wind-up may occur for various reasons, such as the sponsoring employer choosing to close the scheme or being unable to financially support it. Many defined benefit schemes are now closed to new members and have stopped building up new benefits. For lots of these schemes, increasing interest rates in recent years have significantly improved funding levels, and made it more affordable to secure insurance for all members’ benefits and wind-up the scheme.