Pension buy-ins and buyouts: What does it mean?

What is a pension buy-in? 

A pension buy-in occurs when a trustee takes out an insurance policy to cover some or all pension scheme members. A premium is paid to the insurer who will then retain responsibility for funding the insured pension scheme liabilities as they fall due; however, the administration responsibilities continue to remain with the trustee. 
 

What are the benefits of pension buy-in? 

Pension buy-ins bring a range of benefits for trustees and members, and for the insurers. These have been detailed below: 

• For trustees, buy-ins make a significant contribution to improving the level of protection for members. In addition, the sponsoring employer is no longer exposed to the risk of investment returns in relation to the insured members, or to the risk of the insured members living longer than expected. 

• For scheme members, there is unlikely to be any noticeable change when a buy-in occurs on their scheme. From their perspective, all their communications and benefits will be the same, with the only difference being that there is an additional layer of security of their benefits than they had previously.  

• For insurers, the premium that is received at the start of the policy is expected to be sufficient for the insurer to meet all members’ benefits and ultimately to make a profit. Due to administration and management responsibilities remaining with the trustee, buy-ins also offer a more hands-off option for insurers who, at this stage, aren’t responsible for any direct-to-member administration.  
   

What is a pension buyout? 

A buyout happens when a pension scheme trustee makes the decision to convert their buy-in policy into individual member policies where each member becomes a policyholder of the insurer rather than continuing to be a member of the pension scheme. At this stage, the insurance company will not only handle all payment responsibilities, but it will also take on the direct-to-member administration and customer service of members benefits.   
 

What are the benefits of pension buyout? 

• For trustees, all pension liabilities are taken care of by the insurer and there will be no further call for additional money or resources to be put into the scheme if anything unexpected were to happen. Once individual policies have been issued by the insurer to all members, the scheme can enter a final phase called ‘winding up’, which is considered the ultimate end goal for many schemes.  

• For scheme members, a full buyout means that the insurer will be responsible for all future administration, with the security of members’ benefits reliant on the insurer’s balance sheet and the associated regulatory protections. Members may see some change in their communications as customer service duties are transferred to the insurance company, but in most cases the benefits they are due will remain the same, or even improve, depending on the agreements made between trustee and insurer.  

• For insurers, the scheme members become insurer policyholders.  
   

What is the difference between buy-in and buyout? 

A buy-in is essentially an investment decision which hedges the key financial risks associated with the insured liabilities and which adds another layer of security to a pension scheme, while still leaving the trustees with the responsibility of dealing directly with the members. A buyout is then the subsequent transfer of responsibility from the trustee to the insurer with the members becoming individual policyholders of the insurer and ceasing to be members of the pension scheme.   
 

Our approach  

At XPS Group, our experienced team supports trustees and sponsors in relation to risk settlement projects (both buy-ins and buyouts). If you’re considering taking out a buy-in policy, or want to fully buyout and wind-up your scheme, our advisors are here to help.  

Learn more about our Pensions Advisory services here, or contact us to see how we can help.