Buyout

What is a buyout?

A pension insurance buyout occurs when a Financial Services Authority (FSA) regulated insurer takes over responsibility from the trustees and sponsor of a pension fund for meeting the pension promise made by that fund. All links with the former sponsor and trustees are replaced with an insurance policy.

The benefit to the scheme member is that the insurer, unlike the corporate sponsor or pension fund, is required to hold defined surplus assets, called capital, to support the insurance policy. This provides a significant additional level of security. The FSA rigorously monitors these reserves and capital held by insurers.

• A full and definitive settlement of the liabilities insured
• A change in the relationship between the pension scheme and the member
• A transaction that removes liabilities from scheme or employer financial reporting
• A transaction that requires the full cost of the liabilities to be paid for
• A transaction that is usually done for all the liabilities of the scheme (but not necessarily)
• Allows the pension scheme to be wound up

How does a buyout work?

How we work with your data

Pension Insurance Corporation (PIC) carefully examines the scheme data supplied by the trustees or their agents in order to calculate, on a prudent basis, the capital required to meet the benefits promised.

These calculations have a number of elements, but the keys ones are:

• Longevity – each scheme is analysed individually to estimate how long members typically live
• Future investment returns - based on the duration of the liabilities and the current yields available in the market

PIC can provide a guaranteed quotation which will show a price and a transparent market-related adjustment mechanism. This allows the trustees to be sure that insurance capacity is being reserved for them.

It may be possible for PIC to take on the risks caused by market movements affecting scheme asset values in the period immediately prior to signing the insurance policy, during which the contracts and any outstanding due diligence can be completed. Such structures are always tailored to the scheme's particular circumstances.

This removes the risk of market volatility and the uncertainty it may cause for both the trustees and the sponsoring company, especially where the sponsor needs to provide additional funds to meet any shortfall between the scheme's assets and the insurance premium.

Once the transaction has been agreed

Once a transaction has been agreed, the transition process commences. This can typically last anywhere between six months and two years. After this process has been completed, individual annuity policies are issued to the former pension scheme members by the insurance company.

Through the whole process pensioners receive their pension payments when they fall due, in the normal way.