An endgame strategy
DB schemes that are closed to new members and new accrual (members earning benefits) must ultimately choose an endgame strategy. One endgame strategy is to transfer their liabilities to an insurer. The trustees of DB schemes are responsible for choosing an endgame strategy. A DB scheme is said to be in surplus when the total value of its assets exceeds that of its liabilities. When there is an abundance of DB schemes in surplus, more schemes can afford to engage with the BPA market.
Transferring risk
One of the main motivations for DB schemes to engage with the BPA market is for trustees to fulfil their duty to scheme members to secure their benefits and transfer the risk associated with the pension scheme. These include:
- Longevity risk: people are living longer than anticipated
- Inflation risk: the real value of a scheme’s assets, investments, or income is reduced due to unexpected inflation, and
- Investment risk : returns from investments are lower than expected
Engaging with the BPA market involves taking out one of the two insurance policies: a buy-in or a buyout. The main difference between the two is that, whereas a buyout involves transferring all members of the DB scheme, a buy-in involves buying insurance to pay the pensions for part or all of the DB scheme, with the scheme continuing to be responsible for paying members’ pensions.
The BPA market is regulated by the Prudential Regulation Authority (PRA) under the Solvency UK regime. This means that their investments need to reflect the requirements of that framework. Reforms to the Solvency UK framework which came into effect in 2024, are expected to unlock £100 billion in investment in UK productive assets over the next 10 years. These assets include investment in large-scale infrastructure that will support economic growth in the UK.
Resources
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FAQs
Is my pension safe if it transfers to an insurer?
Yes, your pension is safe when it is transferred to an insurer. The security of your pension will increase as insurers are regulated differently from pension schemes. Insurers are required by law to maintain large reserves to cover their financial commitments in extreme economic scenarios.
How will I know if my pension has been transferred?
Trustees must provide the following information as soon as a ‘wind-up' of a scheme is triggered:
- A statement that the scheme is being wound up and the reasons why
- A summary of any actions the scheme needs to take and associated timelines
- Any changes, if at all, to members’ benefits
Do I have to do anything?
You will not have to do anything. You cannot pay any more into a buyout policy, but all your existing benefits are carried over. This means that you will get all the pension benefits you were promised.
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