Typically pension schemes choosing to hold a buy-in policy as a long-term investment and to continue running the scheme would do so to retain the link between the members of the pension scheme and the employer.
The increasing number of pension schemes being able to afford a full buy-in has led to a surge in demand for insurers’ attention, which cannot be met due to capacity constraints.
To prepare for an insurance transaction, a pension scheme should have carried out robust member data preparation work, received a legal sign-off on the benefits to be insured and transitioned their assets to align well with insurer pricing (ie de-risked to a liquid, bond-based portfolio).
We encourage all pension scheme members to support this process by ensuring that their pension scheme administrators are kept up-to-date with their personal information (marital status information, address changes, etc).
The bulk annuity market has grown considerably over the past few years and market commentary suggests the market will continue to grow, with new entrants recently coming into the market and rumours of further new entrants over the course of 2024.
The largest reported bulk annuity purchase written to date covers in excess of £6bn of pension liabilities, and while it is the jumbo deals that grab the headlines, there is a good appetite for insurers to complete transactions at the smaller end of the market too.
Through the streamlining of processes and innovative new business pricing tools, completing buy-ins for schemes with liabilities of £10mn or less can be achieved with the correct planning.
The table below provides an overview of how a pension scheme would operate with a buy-in or buyout arrangement.
Bulk purchase annuity | ||||
|---|---|---|---|---|
| Scheme with uninsured benefits | Partial buy-in | Buy-in | Buyout |
Responsibility for paying member’s benefits | Trustee through the scheme | Trustee through the scheme | Trustee through the scheme | Insurer |
Liabilities insured with | Scheme | Insurer | Insurer | Insurer |
Scheme profile | Liabilities and assets | Liabilities, assets and buy-in policy | Liabilities and buy-in policy | None (liabilities discharged) |
Pension benefits received into the scheme | None, paid directly from scheme asset | Insurer to the scheme (in part) | Insurer to the scheme | None, insurer pays members directly |
In summary, bulk annuity insurance is being increasingly used by pension schemes to provide a high level of security for members, with a natural progression from buying in liabilities, through to full buyout where members cease to be a member of the scheme.
Both provide a means to improve security for members, albeit in different ways.
Jo Carter is a partner in the risk settlement team at XPS Pensions Group
