Buy-ins and buy-outs
What trustees and employers should consider

Updated June 2011

As they seek ways to deal with volatility and control costs in their pension schemes, buy-ins and buy-outs have recently moved to the top of the agenda for trustees and employers. Pension liabilities of around £8 million were transferred to banks and insurers in 2010 and some commentators see this rising rapidly to £50 million by 2012.

Explained here are the key legal issues for employers and trustees should they considering a buy-in or buy-out of their scheme's liabilities.

What are the key legal issues that trustees and employers need to consider?

• Do the trustees have power to do a buy-in or buy-out?
• How do they select an insurer?
• How do they ensure that they are covered for any liability?

Do the trustees and/or employer have power to buy in or buy out benefits?

The starting point is to look at the trust deed and rules: 

• do they have the power to buy-in or buy-out benefits?
• are there any restrictions on the investment power?
• are any amendments needed?

Consider common law duties

The trustees need to consider their common law duties:

• is a buy-in or buy-out of benefits acting in the best interest of the beneficiaries?
• can they prefer one category of members over another e.g. pensioners over deferreds?
• follow the Edge case and consider all relevant factors and disregarded irrelevant factors

Check the Statement of Investment Principles (SIP)

The trustees must refer to their scheme’s SIP:

• check whether a buy-in or buy-out of benefits is permitted under the SIP
• before amending the SIP, the trustees must obtain written advice from an authorised adviser and consult with the employer
• the SIP can be amended after the buy-in or buy-out if the trustees have resolved and minuted to do so within a short period of time afterwards

Choosing an insurer

Once the trustees have checked their trust deed and rules and the SIP, the next step is to choose an insurer. The employer may make some suggestions. The following points need to be considered:

• take financial advice as a buy-in or buy-out is an investment decision
• the size and strength of the insurer
• what would happen if the insurer failed

Which annuity?

Trustees have discretion under English law over the choice of provider. They need only make a reasonable choice.

• When exercising their discretion, ensure that all relevant factors are considered and irrelevant factors are disregarded e.g. the safest available annuity may only be marginally safer but much more expensive than competing annuities, so a slightly less safe but cheaper one could be chosen
• Check the insurer's ability to administer the payment of benefits e.g. a helpline for members and ensure that pension payments are made on the same date of month as current pensions

What is the minimum and maximum the trustees can invest from their scheme?

This depends on the scheme's trust deed and rules and the trustees' relevant powers. In broad terms, they can invest between the minimum aggregate of the cash equivalent transfer value and the maximum share of fund

FSCS v PPF compensation

FSCS (Financial Services Compensation Scheme) versus PPF (Pension Protection Fund) compensation:

• FSCS is better before retirement as it has 90% cover like the PPF but the benefit is uncapped and there is no restriction on future pension increases
• Over normal pension age the PPF is better as 100% uncapped benefits though the restriction on future increases can strip away value

Trustee liability

Once the buy-in or buy-out has completed, trustees want to ensure that they have no further liability for the benefits or for the actions they have taken. Note that on buy-in liability remains with the trustees and on a buy-out it transfers to the insurer. The following points set out how the trustees can cover off their liability:

• Check the exoneration and/or indemnity provisions of the scheme rules
• Check statutory discharges e.g. Trustee Act 1925 if acted "honesty and reasonably"
• Check the trustees' discharge under the rules of the pension scheme
• Buy run-off insurance for missing beneficiaries and data issue, if the scheme rules permit

Next steps

Planning ahead for a buy-in or buy-out – "the 3Ds"

• Delegation: employer to choose a project sponsor and/or trustees delegate to one trustee, having checked the scheme’s delegation power
• Documentation: check the scheme’s trust deed and rules and SIP and consider whether amendments are required. In particular, ensure that any equalisation issues or scheme discretions have been dealt with before seeking quotes from insurers
• Due diligence: start researching insurers and ensure that your scheme data is up to date
   

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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