How to navigate the array of DB pension risk transfer options
Defined benefit (DB) pension schemes have never had as many risk-transfer options to choose from.
All DB pension schemes are different, with their own characteristics and strategic goals that will guide them towards their endgame.
With many DB schemes seeking to transfer some or all of the risk of their pension liabilities while securing member outcomes, the market has developed an expanding range of solutions for endgame planning.
Most DB schemes view a pension buyout as the gold standard because it secures member outcomes and transfers all risk to an insurer. But for reasons of size or funding many DB schemes will not achieve a buyout.
All schemes should view their endgame planning as a series of steps to manage, reduce or remove risk as they progress along the path to their target. The increasing choice of options gives trustees and sponsors more scope to select and tailor risk-transfer solutions that meet their objectives.
What are your risk-transfer options?
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Buyout:The DB scheme pays a fixed premium upfront to an insurer which takes on full responsibility for pension risk and pays all member pensions and benefits directly.
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Buy-in:The DB scheme pays an insurer a fixed fee upfront to assume responsibility for some of the scheme’s pension liabilities. The scheme retains the obligation to its members and makes benefit payments that are reimbursed by the insurer.
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Longevity swaps:The DB scheme pays an insurer to take on the risk that some of the scheme’s members live longer than expected. The insurer agrees to pay whatever benefits are due over time.
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Superfunds:These consolidation vehicles aim to bring many DB pensions under one roof. The link to the employer is severed and the scheme’s covenant is replaced by a capital buffer provided by the employer and outside investors.
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Capital-backed journey plan:A third-party investor provides the DB scheme with extra capital, allowing the scheme to increase its investment risk and accelerate the journey to a pension buyout.
There is also a spectrum of consolidation measures such as professional trustees, fiduciary management or DB master trusts that can enhance member outcomes without transferring risk. These measures can be stepping stones to risk transfer or long-term strategies in their own right.
Choice creates complexity. How should trustees go about making sense of this expanding array of offers?
In this video Shehzad Ahmad, a trustee director at Ross Trustees, talks about how to navigate the options to find the right path for your scheme.
What is it we're trying to achieve through risk transfer? Working collaboratively between trustees, sponsors and advisory teams is really important to answer that question. There's an array of options out there and it’s important to work with people who have risk-transfer experience.
Trustee Director, Ross Trustees
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