The article looks at the way the market for annuities buyout activity has developed over the last decade and at the stresses that market is experiencing as a result of the global downturn through 2008/2009. The following topics are covered:
The origins of the buyout market as a “rescue” for distressed companies, now taken over by the Pensions Protection Fund
The risks facing annuities providers, that the assets will be insufficient to meet the liabilities, and the longevity risk
The pressures in the market pushing companies towards pensions buyout, despite the high relative cost of this solution
Different types of providers in the market
The dynamics of buyout pricing
The trend for larger and larger schemes to adopt a buyout solution
The buyout market for final salary pension or defined benefit (DB) schemes began more than a decade ago in the UK, with Legal & General as the sole provider. At the time, the focus was on distressed companies going into insolvency or administration. A buyout enabled the liquidator to separate off the company’s pension scheme, with its statutory obligations to pay benefits to members, from the company. Instead, the buyout provider would take over responsibility for the scheme and the liquidator would be free to sell on the viable parts of the company, unencumbered by the liability constituted by its pension scheme.
In this context, it is important to remember that, from the company’s perspective, while a DB pension scheme might be a very important part of its overall reward package for employees, the pension fund is, ultimately, just another debt on the company’s books.
For taking over the scheme, the provider would charge the company a fee, and the fee would cover any shortfall between the company pension-scheme’s assets (which would be transferred to the provider) and its liabilities. The liabilities are the totality of the benefits that the scheme is obligated to pay to members for the life of the scheme (i.e. until the last scheme member dies). Often, though, the company was unable to pay the fee because of insolvency, and so the member benefits would be reduced. This line of business from insolvent companies is effectively closed now, as a result of the introduction of the Pension Protection Fund (PPF). The main lines of business are with solvent companies looking to de-risk their liabilities.
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