Running a defined benefit pension scheme can be challenging and costly to your business. Many organisations are opting to go through a buyout process to remove this responsibility, but is that the right choice for you? Finds out more about the process and what’s involved so you can make an informed decision that benefits your business without doing your employees a disservice.
What is a defined benefit pension scheme?
There are two main types of private pensions in the UK: defined contribution (DC) pension schemes and defined benefit (DB) pension schemes.
DC pensions are most common, and your final pot depends on how much you and your employer have put in and the investment returns that money achieves. DB pensions are workplace pensions but nowadays are only offered in the public sector and by handful of private sector organisations, where the scheme rules dictate what you’ll get. The rules are based on a number of factors including your salary and length of service.
With a DB pension, the provider must give you a certain amount each year after retirement to fulfil the terms of the scheme. This certainty is attractive to employees but can be a burden to the companies responsible for ensuring there is sufficient funding to meet future pension obligations, as there is no leeway should investments underperform.
What is a DB pension buyout?
A DB pension buyout is the process of transferring your pension liabilities to an insurance company, which then assumes responsibility for paying the pension benefits. The original buy-in policy is converted into a series of individual policies between the annuity insurer and individual members, allowing you to discharge scheme liabilities while ensuring guaranteed benefits are provided to retirees.
From your perspective as an employer, a pension risk transfer could help secure certainty for your employees while reducing the financial and administrative burden of running a DB scheme. Opting for a buyout also means offloading the dangers associated with the plan’s funding requirements and investment performance and the responsibility of managing potential longevity problems.
When should you consider pension risk transfer?
There are several factors that may prompt you to consider a pension buyout.
One key reason could be the financial stability of your business. If maintaining the DB pension scheme is placing strain on your company’s resources, transferring the pension liabilities to an insurer can free up capital, giving you scope to improve your financial position.
If you have a limited number of scheme members, particularly if they are close to retirement, you should also consider transferring to risk to an insurer. It’s a timely moment to look to streamlining your operations and reducing expenses. Facing a potential sale, merger, or other major structural changes? A buyout could be implemented into your broader M&A strategy in a bid to make your company more attractive to potential buyers.
Whatever reason you have for considering a pension risk transfer, it’s important to weigh the financial advantages of a buyout against any potential downsides such as the impact on employee relations or the loss of any legacy benefits.