If your pension’s been bought out – do you know what you’re missing?


James Mullins of Hymans Robertson recently told Pension Age

“The rapid growth in demand for pension schemes to insure their risks, along with improved pension scheme funding levels, attractive insurer pricing and new alternative risk transfer options, means that we expect a record breaking year for buy-ins and buyouts in 2023.

“This is likely to exceed the £44bn that we saw in 2019. We also expect around £50bn a year of buy-ins and buyouts on average over the next 10 years, in addition to longevity swaps.

“That means by the end of 2031, £1trn of pension scheme liabilities will have been insured, covering five million members’ benefits.”

This surge in buy-out business suits the insurance sector and corporate and trustee advisers very well. But what of members? Are they the beneficiaries of pension scheme buy-outs – or are they losing out?

Let’s look at what an insurance buy-out , buy-in or the purchase of a longevity swap is actually doing. The answer is that it is providing certainty and a promise to members that will normally be better than the benefits paid by the PPF.

It is not promising anything more than the bare minimum promised by the scheme swapping the covenant of the scheme and its sponsor for that of an insurer.

So just how much downside is being exchanged for a capping of the upside? Are these buy-out’s value for the trustee’s money or are they principally benefiting the shareholders and management of the insurers and the retinue of actuaries, lawyers and other advisers that attend the transfer of risk?

First. let’s look at the member’s “worst case scenario”, the Pension Protection Fund”. This has, by any count, been a successful fund. It is in rude health and on course for self-sufficiency from future levies , it now manages £38bn for 288,000 pension scheme members and is multi-award winning for customer service and excellence for finance and investment

Although it takes a haircut of people’s benefits , the prospects for those benefits increasing are strong. The haircut for those who lose most when joining the PPF has reduced since the ECJ Hampshire ruling in 2028 meant no-one entering the PPF can lose more than 50% of their pension. The gap between buy-out and PPF has narrowed and confidence in the PPF to offer more to members is increasing. As I tried to make clear in a blog I wrote for British Steel Pension Scheme members,  the PPF ‘s rules of payment of cash sums and pensions (especially to those seeking early retirement) can actually improve benefits for some pensioners.

If the downside of going into the PPF is reducing , what about the upside of staying in a scheme rather than swapping an employer guarantee for that of an insurer.

Well think about the headwinds created by the use of insurance

  1. You are paying the insurer’s margin, the amount of built-in profit to the shareholder that the insurer has in its pricing. Of course this is not disclosed but the profits of insurers such as L&G, Rothesay Life, PIC , Aviva, Standard Life and Scottish Widows are through the roof – and it’s buy-outs that are driving this windfall.
  2. Insurers are still bound by the EU solvency II rules which , while likely to be diluted so, currently mean they have to take a very cautious view on assets backing the guarantees, this means tying up a lot of capital in reserve and assuming a low growth rate on investments. This feeds through to the cost of buy-out and reduces the likelihood of anything but the bare minimum being paid out by the insurer, discretionary increases? Forget it!
  3. Many schemes have taken on what are proving “hard to sell” illiquid investments which are reported to be being realised at a price way below book value. Buy-out can trigger losses in the asset value of a pension scheme.
  4. Surpluses are not automatically the member’s. Reading WTW’s advice to trustees on the apportionment of surplus, the phrase “seek legal advice” appears rather too often.

When members are entitled to some or all of any surplus, the question arises of how to allocate that surplus. For example, should that be by topping up members’ defined benefits on an equal percentage type basis or equal pound amount per member, insuring enhanced pension increases or some other method?

My question is – who is batting for the member here. Theoretically it is the Trustee, maybe its the lawyer, but if there is a surplus on the fund, why should the fund be buying out?

Why this rush to buy-out?

While it is clear to see that employers would like to be shot of their pension scheme, there is a high price to pay in terms of insurer’s margin and solvency premiums. The argument for a fund to continue as it is or join a superfund which is interested in keeping the fund open is that the potential upside of a current or future surplus can be shared with members, while the downside is protected by employer, superfund or in the last resort the PPR (which as we’ve seen is not such a bad worst case scenario).

I am no corporate financier , but discussions I have had suggest that the risks of an open DB pension scheme sit much easier on a corporate balance sheet than many suppose. Indeed the main reason that many companies consider a buy-out an elixir is out of fright – induced by a combination of pension pressure from regulators, insurers and consultants. The headlong rush to buy-out that we are seeing as schemes move into surplus is going unquestioned. I question whether it is in the interests of many sponsors to negotiate a buy-out of their scheme with an insurer.

What voice has the member?

The member has decreasing say in the fate of his or her pension scheme. The gradual replacement of member nominated trustees with corporate trustees will gather pace if the current pensions minister gets his way. In any event, trustees are now under such pressure from the Pensions Regulator to abandon their duties and wind up their schemes that even with MNTs , the member gets little or no say.

I think this is scandalous. Trustees hold scheme assets for members and administer surpluses according to scheme rules. Insurers, once they have taken on scheme liabilities, are under no obligation to pay a penny of any excess profits generated by scheme assets to members.

Members are often giving away their right to an upside for precious little downside. They are not being made aware of this as their representatives of yore (the unions ) are rarely in the workplace and when they are , are under capacity strain.

In my view, the “buy-out of a trillion pounds of pension scheme assets by 2031″ is a matter of considerable consumer interest. Why are questions not being asked, before the stable door slams shut?


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to If your pension’s been bought out – do you know what you’re missing?

  1. TC jefferson says:

    Great angle here Henry. Buy out is a wonderful solution for many schemes but must not be the only show in town. For many schemes, there is a smarter alternative.

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