Whilst neither the Trustee nor the Company has any plans for an SCPF buy-in or buy-out, because of the interest in the topic we thought it would be helpful to explain a little more about them.
A pension buy-in is where the scheme buys a policy with an insurer which provides income to the pension scheme. This income is the same as the benefit payments being made to some or all members of the scheme. The insurance policy is an asset held by the scheme that is designed to mitigate some of the risks associated with paying pension scheme benefits, particularly investment and longevity risk. It is simply an asset management decision taken by the trustees of the pension scheme. The pension scheme remains fully responsible for making all benefit payments. If the assets of the scheme are insufficient to meet benefit payments, the balance of the cost falls to the sponsoring employer.
A full pension buy-out is almost always associated with the complete closure and winding up of a pension scheme. The pension scheme buys annuity policies for each member which reflect each member’s pension entitlement from the scheme. The insurance company then pays the benefits directly to members, with pension scheme members becoming policyholders of the insurance company. Once all benefits have been secured with an insurance company in full, the pension scheme can be closed and wound up. If there is a surplus in the scheme after the payment to the insurance company and all other expenses, what happens to that surplus is determined by the rules of the scheme. In the case of the SCPF, any surplus is paid to the company.
Insurance companies follow low-risk investment strategies for both buy-in and buy-out policies. Insurers that offer pension insurance are regulated by the Prudential Regulation Authority (PRA) and operate with stringent financial safeguards in place. They are subject to strict PRA standards which require them to maintain significant capital reserves to support the benefits they take on so that they have the financial capacity to meet their obligations to policyholders, even in adverse market conditions.