Buyouts and Buy-ins

Introduction

  • Buy-in policies transfer risk from a pension scheme to an insurance company.

  • Trustees pay a premium to the insurer and in return receive income to cover the agreed benefits for each covered member.

  • Buy-in can be a step towards buy-out where liabilities are fully transferred to an employer.

Buy-in stage

  • At the buy-in stage, the policy is an investment of the scheme and the members have no connection with the insurer. 

  • The trustees continue to have the same legal duties and powers in relation to members under trust law and the scheme rules.

  • The employer continues to be responsible for adequate funding for the scheme.

Trustee powers

  • The trustees should ensure that their investment power under the scheme's trust deed and rules is wide enough to allow the purchase of an annuity policy and to establish any collateral arrangements

  • A rule amendment may be required to ensure that the trustees have adequate powers.

Termination triggers under the policy

  • As the policy involves a long-term relationship termination rights under the policy should be considered carefully.

  • Typical termination rights include material breach, failure to make payment, force majeure and insolvency or significant credit event.

Transfer and assignment of policy

  • The level of flexibility to allow the insurer to transfer within the insurer group and the effect of a change of control of the chosen insurer should be carefully negotiated.

  • Trustees should note that Part 7 of the Financial Services and Markets Act 2000 includes provisions to allow or require a transfer of insurance business through a legislative process.

Buy-in to buyout

  • The purchase of one or more buy-in policies will often be part of a wider de-risking process.

  • Both trustees and the principal employer of the scheme will want to ensure that there is a clear process that allows the buy-in policy to be converted into individual annuities for the covered members, with an appropriate discharge for trustees and employer.

Investment points

  • Trustees may need to amend their statement of investment principles, which involves consultation with the principal employer.

  • They will need to get proper advice on their investment in the buy-in policy in accordance with section 36 of the Pensions Act 1995.

  • They should also consider their wider investment duties under the Act and at common law.

Data protection

  • Member data, including personal member data, will be passed to the insurance company to define the covered members.

  • Trustees will need to ensure that they comply with GDPR / data protection requirements including the issue of appropriate fair processing notices to members

  • The data protection responsibilities of the insurer and trustee should be clearly set out in the policy.

Warranties

  • Trustees should be prepared to give representations and warranties on both their power to enter into the policy and the accuracy of the data that they are providing to the insurer.

  • In respect of data accuracy, trustees should particularly consider if there are benefit or record-keeping issues that need to be disclosed to the insurer on entering into the contract.

Collateral management

  • Where a collateral pool is established, the trustees may need to put in place a custodian or other arrangements to manage the collateral.

  • They will need a process in place to monitor the pool and the accurate posting of collateral by the insurer.

Monitoring and reporting

  • As well as deaths, there may be other reporting obligations on trustees set out under the policy.

  • Trustees should ensure they fully understand all of their ongoing obligations under the policy once it is in operation.