Pension insurance buy-ins are gathering popularity as a means for employers to mitigate the impact of rising pension deficits and avoid closing schemes.
Jay Shah, co-head of business origination at the Pension Insurance Corporation, said: “From a value perspective, pension schemes are comparing the cost of a buy-in versus the amount of liabilities they can back with, say, gilt or bond holdings. They are finding the cost of the buy-in compares well.
“At an economic or value level, they are saying it may be better to exchange a portfolio of gilt and bonds for a buy-in policy that covers all the same liabilities, but that removes more risk than the assets they were holding would. So it covers longevity risk and it protects against periods of deflation. It is just a much better instrument to be backing the relevant liabilities.”
This trend is emerging as defined benefit (DB) schemes continue to close, despite the Pension Protection Fund (PPF) reporting a decrease in the aggregate deficit of private sector DB schemes at the end of February 2013, The PPF estimates that the aggregate deficit of 6,316 DB schemes decreased to £211.2 billion at the end of January 2013, from a deficit of £244.7 billion at the end of December 2012.
Ali Tayyebi, senior partner in retirement at Mercer, said: “With auto-enrolment, lots of people have never been in pension schemes at all, and employers now have to think about those groups of people. That has probably started a bigger review of strategy altogether.”
WAYS OF NAVIGATING DB RISKS
- Pension insurance buy-ins involve an insurer taking over financial responsibility for the cost of meeting the pension promise an employer has made to its scheme members.
- Closing a scheme to future accrual: members’ accumulated pensions savings are preserved at the level recorded at the date of closure. Members must join a new scheme to accrue more savings.