U.K. corporate defined benefit plans have been transferring risk since before the financial crisis, thanks to some significant changes in regulations dating to 2005.
Those changes included the creation of the U.K.'s Pension Protection Fund, London. That agency, similar to the U.S.' Pension Benefit Guaranty Corp., guarantees a portion of pension benefits for members of defined benefit plans with insolvent sponsors.
It was part of “a whole series of measures, which strengthened the effective obligation of the employers that sponsored the pension plans,” said David Collinson, head of strategic development at Pension Insurance Corp., London, one of a number of firms created as a result of plans seeking to unload their liabilities because of the reforms.
Most of the transfers have been buy-ins as opposed to buyouts because in the U.K., in order to completely transfer liabilities to an insurance company, a plan must be at least 100% funded.
Buy-ins occur when an insurance company takes over the financial responsibility for plan liabilities, for which a plan pays a premium, but the links between the pension plan and participant remain. In a buyout, the pension plan transfers assets and liabilities completely to the insurance company and is no longer responsible for them.
Mr. Collinson explains how a pension plan might think: “We are a pension plan and we hold lots of gilts (and) actually we probably would be better off in risk terms holding a buy-in to match our liabilities.”
Those buy-ins that PIC has done are for plans that are not fully funded and use buy-ins as a transaction while the plan attempts to become fully funded for a final buyout at some point in the future, Mr. Collinson said, so individual plans often take on multiple buy-ins.
An example is Aon Minet Pension Scheme, Bristol, England, which completed a second buy-in with Pension Insurance Corp. in November, its third overall.
The £750 million ($1.13 billion) pension fund settled about £210 million of liabilities at that time. Previous buy-ins covered about £100 million in 2012, also with PIC, and one in 2009 with Legal & General Group PLC covering about £140 million.
A buy-in is a step toward a buyout in the U.K., which can only happen when a plan is fully funded. Buy-ins are rarely seen in the U.S. with less stringent requirements to execute a buyout.
“Sponsors have made sure their plans aren't any worse funded than before, but it doesn't have to be a fully funded plan in total to be a buyout,” said Richard McEvoy, New York-based partner and head of Mercer's financial strategies group.
