What is a buy-in?
A buy-in is an insurance policy held by the scheme's trustees as an asset of the scheme.
The policy pays an income stream to the trustees which matches a particular liability of the scheme. In our experience, this often relates to the payment of pensioners' benefits or a particular portion of pensioners' benefits.
A buy-in differs from a buy-out in two important respects:
- the trustees hold the buy-in policy as an asset of the scheme, whereas with a buy-out members hold policies in their own names; and
- the trustees remain responsible for paying the benefits which the buy-in policy covers, whereas on a buy-out this responsibility is taken on by the insurance company.
What legal issues do trustees need to consider?
Trustees should consider the following issues when deciding whether to invest in a buy-in policy:
- whether they have sufficient power in the scheme's trust deed and rules to invest in a buy-in policy;
- ensuring they comply with the requirements of sections 34 – 36 of the Pensions Act 1995 (statutory powers of investment) and regulation 4 of the Occupational Pension Schemes (Investment) Regulations 2005 (which sets out detailed provisions relating to investment by pension scheme trustees);
- ensuring that investing in the buy-in policy is in the best interests of the scheme's members. While the buy-in policy may, on the face of it, only benefit certain members (eg pensioners whose liability it matches) the fact that the policy is an asset of the scheme and its value can be used to benefit all members on a winding-up, trustees should be able to get comfortable on this point;
- the financial protection available from the Financial Services Compensation Scheme should the trustees' buy-in provider become insolvent and from the Pension Protection Fund should the scheme's sponsoring employer become insolvent.
Once trustees have made a decision to invest in a buy-in policy, they should consider the following additional points:
- which liabilities they wish to match. This may be an entire category of beneficiaries (eg all pensioners) or a subset within a particular category (eg pensioners who have pensions in payment over a certain amount);
- which insurer to use. This may include a review of its covenant and investigating where the trustees would rank as a creditor if the insurer were to become insolvent;
- whether they wish to medically underwrite the buy-in so that they potentially pay a cheaper premium;
- how their investment strategy might change after the buy-in to ensure that it remains appropriate. Trustees may wish to take advice from their investment adviser on this point; and
- in what circumstances they are able to surrender/cancel the policy and how the value of the policy will be calculated.
How can we help?
We have recently advised a number of trustee boards of defined benefit pension schemes on their de-risking strategies and have completed several buy-in exercises on both standard terms and where members were medically underwritten.
In addition to advising the trustees on all of the points set out above, we also negotiate the legal documents with the insurers to ensure that the trustees have sufficient legal protection.
If you would like further information on buy-ins and how we might be able to help, please speak with James Dean on +44 (0)333 006 0717 or by emailing james.dean@TLTsolicitors.com.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com