Buy-ins and buy-outs - risk transfer to the insurance market

Pension risk transfer to the insurance market, typically known as a bulk insurance transaction, is a well established end-game for UK defined benefit (DB) pension schemes and often considered the gold standard for de-risking pension schemes and securing the member benefits.

Under a bulk insurance transaction a pension scheme invests in an insurance policy to secure the member benefits and transfer associated risk, both financial and life expectancy, to the insurer. There are a number of market participants in the UK who can provide pension risk transfer solutions.

In addition to securing member benefits, insuring a pension scheme usually allows the trustees to discharge their fiduciary responsibility while removing pension related risk from the sponsoring company’s books.

Pension risk transfer is intended to increase certainty that the benefits will be paid to the pension scheme members in future.

The key benefits of pension risk transfer to the insurance market are:

Risk transfer transactions can precisely match the liabilities in terms of interest rate, inflation and longevity risk
This matching means investment risks are largely removed as scheme assets are typically replaced by an insurance policy
Members are further protected by UK’s FSCS (Financial Services Compensation Scheme) in case of a default in relation to the insurance policy
For trustees, securing benefits with an insurance company meets their duty to ensure members’ benefits are paid in full and allows them to discharge their fiduciary obligation
Once fully insured, the pension liabilities can be removed from the sponsoring company’s books, removing all management time commitments, financial risks and potential cash requirements

As the average funding level across UK pension schemes improves and more people retire and become pensioners, pension risk transfer is expected to become more affordable leading to increased deal volumes in the pension risk transfer market.

In a demand-heavy environment, a bespoke approach could lead to a better outcome for everyone involved. This could mean understanding the market drivers and then engaging with insurers with clear transaction objectives in mind.

One key risk is counterparty risk - a risk of default by the insurance company. This needs careful consideration; especially where the insurance policy purchased under risk transfer is held by the pension scheme instead of by the members directly. The comments made above in relation to coverage under the FSCS apply i.e. the usual view is that the schemes are entitled to the benefit of FSCS protection, although this is similarly untested in practice.

PwC has vast experience in this area and by combining our pensions and insurance capabilities we regularly help our clients prepare and execute pension risk transfer deals. We’ve worked with many schemes to identify the right, deal-focused, way to proceed for their specific needs and circumstances.

The following are some of the ways we have and continue to help our clients.

Decide on an end-game strategy
Getting quick accurate initial pricing
Get “trade ready”
Execute the transaction

Decide on an end-game strategy

Insurance solutions are only one part of a potential end-game strategy. We help our clients consider a wide range of innovative and traditional solutions including analysis of what type of transaction is appropriate at which time, and how to get there.

Getting quick accurate initial pricing

Scheme trustees and sponsors must be able to make these significant decisions on the basis of accurate information. Using market-leading technology through PwC Insure we can quickly secure initial prices from insurers for your scheme, helping you to identify opportunities and act on them.

Get “trade ready”

We can help you get “trade ready”, with your data and legal documents and with a clear idea of your objectives and price targets for a transaction. This will put you at the front of the queue when insurers in a busy market are prioritising deals and importantly avoid last minute surprises on cost and timing.

Execute the transaction

PwC’s strong relationships with insurers and new providers, our keen commercial focus, and independence from existing actuarial or investment mandates means we have the insight to maximise market engagement with your transaction and obtain the best deal for you.