Defined benefit pension liabilities – transferring risk to insurers

Opportunities in a favourable market

The funding level of many defined benefit pension schemes continues to be significantly stronger than it was a few years ago. Insurer pricing of bulk annuity contracts is often attractive owing to favourable economic conditions and increased competition from new market entrants.  Together, these factors have made the cost of insurance solutions affordable for many schemes which were previously not sufficiently well funded to consider a transaction. Other schemes, already on the journey to a transaction, have seen their timeframes shorten. For many scheme trustees and sponsors, the opportunity to secure some or all scheme liabilities via an insurance solution is a live possibility. 

Insurance solutions

An insured buy-in contract is effectively an investment which enables the scheme trustees to match some or all of the scheme’s liabilities. Although the trustees remain responsible for paying the benefits, risk is transferred to the insurer. A buy-in is often implemented as a step towards buy-out. 

Under an insured buy-out contract, some or all of the scheme’s liabilities are transferred to the insurer which takes on responsibility for paying the benefits. In cases where all the liabilities of a scheme are bought out, the scheme can then be wound up. This brings an end to the role of the trustees, enabling them to be discharged. For sponsors the key benefit is taking the pension liability off the sponsor’s balance sheet, eliminating the cost and volatility of maintaining a defined benefit scheme. In some cases, the scheme will have surplus funds, some or all of which may be returned to the sponsor when the scheme is wound up. 

The benefits of preparation and professional support

Although capacity in the insurance market has recently increased, it has not kept pace with the surge in demand. Schemes which are well prepared are at an advantage to secure an insurance provider and competitive pricing. 

When evaluating potential clients, insurers value thorough preparation and the support given by expert professional advisers to enhance the likelihood that the
transaction will complete successfully. The insurance contract itself will often be the biggest and most important transaction in the lifetime of the scheme. 
Getting it right is critically important. 

How can we help?

The key to a successful insurance transaction is preparation. Several legal issues must be addressed to make a transaction possible, including: 

• Preparing the benefit specification.
• Reviewing discretionary powers and member options relating to benefits and planning how to deal with them within the insurance contract.
• Reviewing and potentially amending other relevant trustee and employer powers, including those required to complete the winding-up of the scheme.
• Cleansing scheme data and equalising guaranteed minimum pensions.
• Addressing funding issues, including any need for additional funding and (increasingly) how to allocate surplus. 

At Weightmans, we have specific experience in this field. In conjunction with employee benefit consultants, we work with employers and trustees to help them achieve their objectives. Our clients are supported by a multi-disciplinary team, providing relevant expertise not only in pensions law but also in insurance, banking and financial services and commercial transactions.

Our team is led by partner, Mark Poulston. Mark is a pensions specialist with a background in insurance. He is a Fellow of the Pensions Management Institute and a Chartered Insurance Practitioner. In addition to his pensions law practice, Mark is the director of a pension trustee company.