Buy-outs: Basics
A buy-out is the bulk purchase of annuities in respect of some (partial) or all (full) of the members of a pension scheme.
The difference between a buy-out and a buy-in is that, in the former, the annuities are purchased in the names of the scheme members and the liabilities involved are removed from the scheme entirely.
For this reason, a full buy-out often precedes a formal wind-up of a pension scheme.
The process
A full buy-out of a pension scheme is a lengthy and expensive process.
One of the first steps is for the trustees and the sponsoring employer to identify a selection of reputable insurance companies from which to obtain quotations. It will also be necessary for the trustees (or more probably the scheme administrator on their behalf) to conduct a “data cleanse” to ensure that the scheme data is accurate and up to date.
Prior to selecting a final provider, it is imperative sufficient due diligence is undertaken. Given the long term nature of pension liabilities, a primary concern for the trustees will be the financial strength of the insurance company.
Trustees will need both legal and actuarial advice on the buy-out. For example, lawyers will need to confirm that the insurance company policy accurately reflects the scheme’s benefits. They should also review the insurance provider’s investment strategy and administration systems and controls to ensure benefits will be paid in a timely manner.
The sponsoring employer
Unless a scheme is fully funded on a buy-out basis, a full buy-out (and often a partial buy-out) will generally involve an additional contribution by one or more of the participating employers. However, employers are often willing to make such a payment in return for de-risking their scheme.
Commonly used abbreviations in pensions
+44 (0)20 7329 6699
enquiries@sackers.com
20 Gresham Street, London, EC2V 7JE - 
