Should DB Schemes buy into the case for buy-ins?

Buy-ins can be a useful tool in schemes’ armoury as they de-risk into their endgames, but only under certain conditions.

As defined benefit (DB) pension schemes mature and become better funded, they are increasingly looking to insurance solutions to help them de-risk. Three common solutions are:

• Buyout: the scheme pays a premium to an insurer, which takes ownership of a portion of the scheme’s assets as well as the liability of being responsible for paying the pensions of the scheme’s insured members
• Buy-in: similar to a buyout, but having been paid a premium by the scheme the insurer makes payments to the scheme, which pays the members in turn. The trustees treat their insurance policy as another asset
• Longevity swap: the scheme transfers the risk of paying for its pensioners living longer than expected to a counterparty in the form of a commitment to exchange payments throughout the term of a swap.

In this paper we focus on buy-ins, whose key benefit is that they remove all the risks of those members covered by the policy. These include investment risk, re-investment risk, rates and inflation risk and longevity risk.