Alternatively, trustees could look to insure a sub-set of the scheme members, for example only insuring the pensioners in payment.
This would be a partial buy-in and would only remove the risks in respect of members covered under the policy.
This is seen as a de-risking step for the pension scheme, which would retain some conventional investments in addition to the buy-in policy.
What is a buyout?
A buyout is where the pension scheme member changes from being a member of the scheme, to owning an insurance policy that pays their benefits directly.
In practice, the pension scheme would first have to purchase a buy-in policy for all scheme members.
Once the buy-in policy had been fully finalised (in practice, this generally happens one to two years after the initial buy-in policy is purchased), the trustees would have the option to instruct the insurer to convert it to a buyout.
This would involve the insurer issuing an individual policy to each scheme member.
The liabilities are then discharged from the pension scheme and it can be fully wound up. This removes the pension scheme from the sponsoring employer’s balance sheet – in contrast to a buy-in where it remains on the balance sheet.
The insurance policies under both buy-in contracts and buyout contracts have the additional security of the Financial Services Compensation Scheme, which is expected to fully compensate the policyholder should an insurer be unable to meet its obligations.
Full buyout and full buy-in have similarly high levels of security for members. However, schemes that have a partial buy-in are still exposed to the risks relating to uninsured members, and because the insurance policy is held by the scheme this risk affects all members of the scheme.
The Pension Protection Fund is the lifeboat for pension schemes but provides lower levels of protection for members than the FSCS.
Further details of the FSCS and PPF benefits can be found here.
How a scheme transacts
It is common for pension schemes that have reached, or are close to reaching, a fully funded position on a solvency basis to approach bulk annuity insurers for a buy-in insurance quotation, with the intention of purchasing a buy-in policy.
Following the buy-in transaction, the insurer will typically then allow a scheme a further one to two years to complete certain data cleansing actions to ensure that the correct benefits are insured for the correct members, before converting the buy-in policy to a buyout.
While not all schemes that purchase buy-in policies go on to convert the buy-in to buyout, it is not possible to undertake a buyout without first buying-in.
