Buy-ins: Basics
A “buy-in” is simply an annuity held in the trustees’ name. By contrast a “buy-out” is an annuity held in the member’s name.
Buy-ins are simply another scheme investment and are attractive to employers and trustees as they remove volatility from scheme funding and, effectively, “lock the safe”, by matching part of a scheme’s liabilities with an annuity policy.
The Process
Trustees should approach a buy-in in the same manner as they approach any new scheme investment. For example, they should consider whether:
- the scheme rules allow investment in a buy-in policy;
- there is written investment advice in support of the decision to undertake a buy-in; and
- the sponsoring employer has been consulted.
Key decisions to be made are:
- which insurance provider to use; and
- which scheme liabilities to cover.
It is not essential for the benefits to match all the liabilities of the scheme. However, if the buy-in is an initial step towards full buy-out (see Buy-outs: Basics) then the trustees may want to match benefits and liabilities so far as possible. A detailed benefit specification will need to be prepared so that the correct benefits are priced and secured.
Once the specification is agreed and the purchase made, the trustees will transfer assets to the insurer in return for the payment of an agreed stream of income for the duration of the lives of the individuals insured.
As far as the members involved are concerned nothing changes; the pension scheme remains responsible for the payment of their benefits.
Commonly used abbreviations in pensions
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