A buy-in policy is one way of transferring risk from a pension scheme to an annuity provider, normally an insurance firm. The trustees pay a premium to the insurer and in return receive a regular income which essentially matches the agreed benefits for each member of the scheme.
This transaction is simply an investment of the scheme; the benefits are not directly paid to the members, and there is no direct legal link between them and the insurer. With that in mind, the trustees continue to exercise their usual powers under the scheme rules, and remain liable to pay members’ benefits. The employer, on the other hand, remains responsible for making up any shortfall.
A buy-in can be an effective way for the trustees to de-risk at least part of the member liabilities, while still recognising that full annuity purchase for all members, the buyout, remains some way off.
As highlighted, the two key parties to a pensions buy-in are the trustees and the employer. There are certain legal considerations which they need to reflect on: power to enter into the contract; investment or financial advice; data protection; and representations and warranties.
In terms of members’ consent and communication, the trustees are under no obligation to obtain member consent in respect of a buy-in or any other form of communication, but they should check the provisions of the scheme rules.
As a buy-in is a form of investment, the decision of whether it should be pursued is generally at the discretion of the trustees. However, the employer will usually derive some benefit from a successful buy-in in the form of reduced investment volatility, and trustees may wish to seek a financial contribution from the employer to take account of this.
Although there are a number of complexities when it comes to buy-ins, there are also some advantages for trustees and employers when carrying out this type of transaction. For example, trustees retain control of discretions and payment of benefits to members, there is also the removal of investment, mortality and inflation risk for members, the provision of a simple income stream, the benefits derived from the insurer and principal employer covenant by the trustees, and low investment volatility for the trustees and employer.
Larisa Gordan is solicitor at Irwin Mitchell LLP