Members’ benefits are secured through the purchase of individual annuity policies for each pensioner and deferred member; consequently individuals become policyholders of the insurer, and cease to be scheme members. Typically these types of transactions are followed by the scheme winding up. The Buyout allows the trustees to obtain a full discharge in respect of the benefits secured, and the members gain the comfort of knowing their benefits are protected within a regulated insurance regime.
The portion of benefits that is to be secured may be based on a number of factors, including member status or age. This can be repeated with different subsets or populations, allowing the trustees to target specific risks over time. For those members’ benefits which are transferred, individual policies are issued to each pensioner and/or deferred member. The partial buyout allows the trustees to obtain a discharge in respect of those specified benefits secured, and these members gain the comfort of knowing their benefits are protected within a regulated insurance regime.
A single insurance policy is secured in the name of the trustee, and held as an investment within the continuing scheme structure managed alongside any other scheme assets. The trustees remain responsible to the members to provide their benefits, and typically continue to administer the scheme as before. The trustees obtain a matching asset that produces an income stream equal to the benefits specified to the insurer (usually those the trustees expect to pay out), thus achieving risk transfer without the need for more fundamental changes to the scheme.
It is most commonly used to transfer a particular type of risk (e.g. mortality) from an insurer with a limited appetite, to one with a greater appetite – or to increase the capacity of the direct insurer.