Buying-in and buying-out of Defined Benefit schemes

Securing defined benefits with an insurer can make good sense

For trustees and sponsoring employers of Defined Benefit schemes, the growing burden of regulatory compliance adds additional layers of risk and cost to running a pension scheme.

Many see buy-ins and buy-outs as an attractive solution. With both buy-ins and buy-outs, trustees and sponsors are able to transfer risk from the scheme to a specialist insurer.

Where trustees choose a buy-in, they retain the liability for providing member benefits. With a buy-out, on the other hand, they pass that responsibility across to the insurer, lifting away the combined burdens of risk and scheme governance.

How can First Actuarial help?

First Actuarial offers a tailored service to identify the right risk transfer solution for your scheme. Our specialist risk transfer team advises clients on both buy-outs and buy-ins, and we work with all the insurers in the market.

We use our extensive experience to help you find a solution that will meet all your needs.

We can estimate the cost of securing your liabilities and track that for you over time. And through our Client Hub, you can monitor your scheme’s funding level on a daily basis. This makes it easier to spot attractive and suitable risk transfer opportunities as soon as they arise.

We never forget how worrying a buy-out can be for scheme members, as pension provision moves to an unfamiliar insurer. We can take their anxieties away by providing clear and comprehensive information at every stage.

For many schemes full buy-out is not the answer. We use our knowledge of insurers and their costs to identify the approach that will deliver the best value for money.

Where the immediate cost of a buy-out turns out to be prohibitive, we will draw on our knowledge of insurer costs and work with you to create a structured plan.

We recommend this step-by-step approach:

Step 1: Agree a suitable timescale

Step 1: Agree a suitable timescale

A risk management exercise is often a long-term project requiring responsible proactive management.

If you can’t afford to buy out straight away, a managed delay can get you to full buy-out cost-effectively, allowing good investment returns and additional employer contributions to build up over time.

We’ll take the time to understand your scheme. We’ll talk with you about your budget, your investment risk and your membership profile. And then we’ll set a timescale that works for you.

Step 2: Set the right investment policy

Step 2: Set the right investment policy

Setting the right investment strategy goes hand in hand with agreeing a suitable timescale. It’s all about gauging how much your sponsor is willing to pay to control the risks involved in your scheme.

We will help you set the right strategy for you and your sponsor, and monitor it to make sure it remains appropriate for you.

With the Triggers tile of our
Client Hub, you can reduce your investment risks if you find yourself ahead of schedule. This will make it much more likely that you will hit your buy-out target date.

Step 3: Sort out your data

Step 3: Sort out your data

Most pension schemes have been in operation for decades, and administration errors will have accumulated in many schemes.

Many will have been administered by a series of providers, all with different practices. Legal views have changed too – and approaches taken in the 1990s may not be acceptable today.

Unfortunately, this means that almost all schemes hold incorrect member benefit data.

Your data must be accurate if you plan to undertake any risk transfer exercise, and any Guaranteed Minimum Pensions (GMPs) now need to be equalised.

If insurers aren’t confident
that the data is in good order
they can charge a significantly higher premium.

Step 4: Set up liability reduction exercises

Step 4: Set up liability reduction exercises

Liability management exercises can reduce your bulk annuity costs. Making an offer to members prior to buy-out can make sense to all parties. It may be financially advantageous to members in certain circumstances, and will also keep your costs down.

To manage any reputational risk and to treat members fairly, it’s important to explain such offers clearly and discuss the issues openly. That way, members will only accept the options you offer if they are right for them.

Why choose First Actuarial?

We offer in-depth experience and structured processes to simplify the complexities of risk transfer exercises such as buy-ins and buy-outs.

We specialise in transactions below £100m which, without the right approach, can be hard to run at a competitive price. A key element of our approach is our strong relationships with all the major insurance providers. They trust us to deliver on our commitments. This allows us to recommend the best insurers for you. Insurers are limited in the amount of new business they can take on, and their first choice will be to work with consultants they trust.

Excellent administration is the cornerstone of a risk transfer exercise. We work hand in hand with our administration team to make your data demonstrably accurate. This gives the insurer the confidence to offer their best price, knowing problems won’t arise later on.

A risk transfer exercise is a complicated process involving complex decisions. Here at First Actuarial we take the time to support you through the process, helping you make informed decisions at every stage.

We’ll work with you in an ethical manner, offering the right options to your staff and explaining their options clearly. This will keep costs and reputational risk to a minimum.

We offer great value for money. We work on a fixed-fee basis whenever possible, and with our pragmatic approach we will offer you the most efficient path through to your risk transfer.

Learn more about our buy-in and buy-out services

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Get in touch

Get in touch with one of our specialists to discuss how we can help you.

We feel reassured that First Actuarial has provided us with advice that is credible, in a way which a lay person can readily understand. This has helped us make informed and far-reaching decisions in a complex area.

First Actuarial case studies

Amusement Equipment

Amusement Equipment’s Defined Benefit Scheme was costly to run, with unknown liabilities that worried its directors. The company struggled to find a specialist adviser prepared to help wind up its small Scheme.

First Actuarial delivered the outcome we wanted. Everyone is satisfied – both Employer and beneficiaries. Without First Actuarial, the pain of running the Scheme could have continued for years to come. Few actuarial advisers are interested in small schemes like ours, so we struggled for years trying to find someone to help us. However we finally got what we wanted from First Actuarial. To any company in the same situation, I would recommend them without hesitation.

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SBAC

As a result of an unusual clause in their trust deeds, Trustees of the pension scheme sponsored by the Society of British Aerospace Companies (SBAC) funded their liabilities on a buy-out basis.

“First Actuarial are very proactive. They respond quickly and get things done. They have proved to be competent and conscientious, and have a very professional and personable approach to business relations.”

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Oil and Gas Industry

Concerns about the mounting costs of a Defined Benefit (DB) Scheme in the oil and gas sector came to a head when a valuation revealed the need for 50% employer contributions. After presenting all the options, First Actuarial supported the...

The costs of running a DB Scheme were continually increasing for a company in the oil and gas industry.

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