Employee benefits: pensions - retire gracefully
Pension buy-outs look good to employers, but what does everyone else think?
Pension buy-outs look good to employers, but what does everyone else think?
Since mid-2007 the pensions scheme buy-out market has taken flight. By the
end of 2007, almost £3bn of business had been written and some estimates suggest
that another £6bn may have been written by the end of the third quarter of 2008.
Buying out can improve an employer’s balance sheet significantly but it can
also sever the link between the employer and the members’ pension benefits. It
is vital, therefore, that employers also consider what the members, scheme
trustees and other interested parties think about a buy-out before committing
themselves to it.
Members and trustees concerns
The employer is likely to focus on the premium charged by the provider for
the buy-out, but the trustees’ and members’ concerns may conflict with this.
Members want to receive the pension benefits they have earned in full and
the different insured and non-insured solutions offer various levels of
protection for their benefits.
The trustees will check that the provider offers security for members’
benefits which is at least as good as that provided by the employer. They will
also be concerned about the quality of its administration, any liability
management or enhanced transfer exercises, and their own ongoing involvement.
What are the options?
The insured solutions
Most people are only aware of the traditional buy-out solution where the
scheme is put into winding-up and all liabilities are secured with individual
annuities at the end of a long winding-up period. There are now many variations
on this and a ‘buy-in’, where the scheme does not wind up at all, is becoming
more popular. Here the trustees acquire a bulk annuity contract in respect of
certain members (usually pensioners) as an asset of the scheme.
For members, insured solutions generally offer a very good level of security
as the FSA requires providers to hold certain minimum levels of capital and
reserves. Even so, some trustees may want to carry out due diligence and may
request additional security or collateral from the insurer.
The non-insured solutions
Other providers, which are not FSA-regulated insurers, have offered solutions
where they take on the pension scheme by replacing the existing employer and
providing stronger employer covenants themselves.
Trustees will want to assess the covenantof the non-insured provider on the
same basis as they would assess the covenant provided by the existing employer.
Although the pensions regulator has made life more difficult for the
non-insured providers recently, it is unlikely that we have seen the last of
them.
Who else has an opinion?
The government and the pensions regulator expect employers to pay whatever is
necessary to fund members’ benefits in full. They have no objections to benefits
being bought out in full with an FSA-regulated insurer where a scheme has
already been closed for future service but want to prevent the possibility of
scheme abandonment.
Also, in some cases the trade unions may not be happy, especially if schemes
are being closed to future service. They want employers to continue providing
defined benefit pensions and some union officers have characterised buy-outs as
‘smash and grab raids’.
Matthew Preston and Samantha Brown are
solicitors at Herbert
Smith