What pension risk transfer options are available to me?

Recently, many UK businesses have found themselves with healthier defined benefit (DB) pension schemes, making pension risk transfer an increasingly viable option.

If your team is responsible for managing a pension scheme, you may be considering how to handle its risks and liabilities. There are several pension risk transfer options available to you, offering a way to lighten the long-term financial load by shifting some or all of the risks to a third party. These often include investment, inflation and longevity.

Insurance solutions

Insurance is one of the most established methods for this transfer, providing the highest level of security. A full buyout involves paying a lump sum premium to an insurer, which then takes on the responsibility of paying members’ pensions as promised. By doing this, the scheme effectively ‘outsources’ all of its obligations, ensuring that future payments are guaranteed by a company regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

Alternatively, a buy-in is a stepping stone toward a full buyout. In a buy-in, the scheme buys a policy from an insurer that matches its liabilities. However, it continues to manage the assets and pays pensions, with the insurance company providing a safeguard. This option offers flexibility and can be a more affordable interim solution before committing to a full buyout.

Longevity swaps

These are a more specialised option used by very large pension schemes that want to manage this type of risk without transferring all other risks. This arrangement involves a series of fixed payments from the scheme to a counterparty, typically a bank or a reinsurer. The counterparty, in turn, agrees to pay the scheme the actual pension amounts required to cover a specific group of members.

If those members live longer than expected, the counterparty bears the additional costs, thus offering protection from unexpected longevity risks. This means that while the scheme retains control over its assets, it can reduce the danger of paying for pensions longer than initially projected. However, it is important to note that longevity swaps do not protect against investment or inflation risks.

Consolidation options

For schemes that can’t afford a full insurance buyout in the short term, consolidation options provide a good alternative. One of the most notable new options in the market is the superfund model. Under this approach, the scheme’s assets and liabilities are transferred to a new vehicle, a superfund, which is supported by a capital buffer from external investors. The original sponsoring employer’s link to the scheme is removed, with the pension security now dependent on the superfund’s investment strategy and capital strength. The Pensions Regulator (TPR) oversees this structure to ensure member security remains robust.

For smaller schemes, or those that prefer to maintain some link to the original sponsor, DB master trusts are another consolidation option. In this model, multiple schemes pool their assets and liabilities under a single trustee board. The larger, more efficient structure allows the schemes to benefit from better governance and investment strategies, increasing the likelihood of improved funding levels over time. The sponsor remains linked to the scheme, but the consolidated nature of the arrangement can make future buyouts more affordable and achievable.