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WHAT IS A BUY-OUT OR BUY-IN?
The term buy-out usually refers to an insured buy-out, in which an occupational pension scheme transfers the responsibility for its pension obligations from the scheme to a regulated insurance company. A full or partial buy-out of benefits leads to individual insurance policies being purchased for members.
An alternative is to purchase a buy-in policy. This is where the scheme purchases an insurance policy covering the benefits of members. This policy becomes an asset of the scheme that matches the liabilities in respect of insured members. The pension scheme receives a regular payment from the insurer that exactly matches the sum of the payments the scheme owes to its members.
There have been other transactions in the United Kingdom, which involve a non-insured solution to securing all or part of the pension liabilities. Typically, non-insured solutions involve corporate deals in which all or part of the pension liabilities are transferred from one corporate sponsor to another. Such transactions are often complex and are not strictly 'pension buy-outs'. Non-insured solutions are not considered in this paper but trustees should be aware that there is a further alternative available.
FULL OR PARTIAL BUY-OUTS
Pension buy-outs with an insurance company can be either full or partial buy-outs.
A full buy-out involves the transfer of all of the pension liabilities to the insurance company. Once the individual insurance policies have been issued to the members then the wind up of the scheme can be completed and the trustee's responsibilities discharged.
A partial buy-out is different from a full buy-out because not all of the liabilities in the scheme are insured. This means that the scheme will remain in operation and will continue to manage the uninsured liabilities. When proceeding with a partial buy-out it is important that trustees carefully balance the interest of one group of members against another group of members. This is particularly important if the scheme is under-funded and, for example, pensioner benefits are secured with an insurance policy whereas the deferred member benefits are not. There is a risk that securing one group of members benefits will weaken the position of the non-insured members.
TREND IN THE UK BUY-OUT MARKET
The UK buy-out market accelerated during 2007 and the...