An insurance policy that covers a proportion of the pension scheme's liabilities and is held as an asset by the scheme.
Buy-in at a glance
- Removes the risks of investment, longevity, interest rate changes and inflation for the members covered by the policy.
- Can cover a subset of the liabilities allowing ‘partial de-risking’. For example, deferred pensioners, current pensioners or subsets of either.
- Held as an asset of the scheme and we make monthly payments to the scheme in relation to benefits of covered members.
- Premium can be paid using cash or in-specie transfer of scheme assets.
What does it do?
- A buy-in is an insurance policy that covers a proportion of a pension scheme’s liabilities, such as the pensioners in-payment. The policy pays an income equal to the benefits of the members covered and therefore removes the risk of there being insufficient assets to meet those future liabilities.
- A buy-in is an ‘exact match’ to the covered liabilities and is held by the scheme as an asset alongside other investments. Some schemes will hold buy-ins as part of their de-risking journey plan or as part of an endgame self-sufficiency strategy.
How does it work?
- The trustees pay a premium to us in return for a buy-in policy. Under the terms of the policy we agree to pay the benefits set out in the policy for the covered members until they die along with any death benefits, such as dependants’ pensions.
- We are required by regulations to hold surplus funds called 'capital reserves' to support the insurance policy. These reserves are set at a level such that we are expected to be able to meet the liabilities, even under extreme scenarios.
- The trustees and sponsoring employer retain ultimate responsibility for meeting members’ benefits but the insurance policy is designed to ensure that there are always sufficient funds available.
What options are there?
- The insurance premium will typically be paid by the scheme in full at the start of the policy.
- In some cases it may be beneficial to implement a forward starting buy-in to allow a greater proportion of the members’ benefits to be insured than might otherwise be affordable.
- The typical approach is for an entire subset of members to be covered by a buy-in (for example, pensioners in-payment). However a tranched approach to de-risking may be the right approach in some cases, particularly when the scheme is progressing through a longer term journey plan to de-risk.