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A Guide to Pension Scheme Buyouts

The buyout market has changed in recent years, most notably due to the financial crisis, and includes various options and a number of products available.

A pension scheme buyout is a type of financial transfer whereby the pension fund sponsor pays fixed amounts in order to transfer benefits within a workplace pension to an individual policy, freeing it of any liabilities relating to that fund.

A buyout scheme may also be used to cover situations where both assets and liabilities of a Defined Benefit pension scheme are taken over by an insurance company. These may be used in both the long and short-term, and once agreed, the scheme can typically last between 6 months and 2 years.

It is advised that trustees and companies carefully select advisors to ensure that they attain the correct advice, maximise value through use of the scheme and a successful outcome. Insurance companies can provide tailored and innovative solutions that will suit both circumstances and budget.

The key to a successful transfer though is to ensure engagement from all relevant parties at the early stages of the scheme, so that all involved are aware of the proceedings and are at the same level with regards to data preparation, strategy and all legal aspects.

It is important that accurate scheme data is carried out to improve the efficiency and comparability of the quote, reducing risk of delay. Delaying the scheme could cause problems as external factors within the market are subject to change. It’s important that all trustees are legally eligible to complete any de-risking procedures.

Both long-term investment strategy and short-term transactional requirements should be considered when reviewing investment strategy before deciding upon the approach. When this has been decided, a request for the proposal is prepared. Typically, a timescale for an initial quote is 3-4 weeks, but it could be up to 8 weeks if you want one that is more accurate.

Things to consider before going ahead:

– Offers made should be clear, fair and not misleading
– Members should be able to understand risks
– Offers should be transparent so that all parties involved are aware of all aspects and are under no pressure
– Conflicts of interest should be identified, managed and removed if necessary
– Trustees should be consulted from the beginning of any process
– Any concerns should be addressed before proceeding
– Members should have access to independent financial advice

Benefits of a pension scheme buyout:

– Significant security is added and is a preferred way to transfer risks
– Reserves and capital held by the insurer are regularly monitored
– A full, secure definitive settlement of liabilities are insured
– Members are provided with more choice via pension increase exchanges and early retirement – improving the funding situation for remaining members
– Regarded as a powerful tool in company and trustee security to assist corporate transactions
– Managing a scheme’s liabilities ahead of the buyout may reduce overall settlement cost
– Liability management in a defined pension scheme may help control or reduce future benefit payments.

Although, these schemes are popular (having seen an increase in the UK and US), at the point of deciding a proposal, the following should be considered:

– It is important to understand what you are buying (or not)
– Select the right insurer
– Consider whether the buyout is a long-term de-risking plan or a short-term solution to acute commercial problems
– Independent, professional advice must always be considered

And you?

If you’d liked to learn more about how pension scheme buyouts work then get in touch today for an obligation-free chat on how Pareto can best meet your individual requirements or fire us over a tweet.