Introduction to Pension Buy-Ins and Buyouts
The figures fluctuate from year to year, but a growing number of private-sector defined-benefit (DB) pension schemes (principally “final salary” schemes) are taking out “buy-in” policies with insurance companies. Until about five years ago, however, few of these were going all the way to a full “buyout”, but the numbers of buyouts is now starting to accelerate.
So, what does all this mean when it comes to sharing pensions on divorce?
What is a “buy-in” policy?
A buy-in policy is a contract between the trustees of a DB pension scheme and an insurance company. In return for an up-front premium (which could run into £billions for the largest of schemes), the insurer undertakes to pay an income to the trustees that broadly matches the pension outgo of all, or a specified sample, of the scheme’s membership for as long as the members covered by the policy (and their surviving spouses/partners) live.
This type of policy is also known as a “bulk annuity” policy, because the trustees are buying annuities for multiple members collectively at the same time, with terms that match the scheme’s rules on such matters as pension increases and attaching spouse’s pensions. So, this is quite different, for example, to each individual member of a defined-contribution pension arrangement buying an individual annuity at retirement, where they select the level of pension increases (if any) they desire and whether to include any provision for their spouse/partner following their death. Also, bulk annuity policies will often cater for “deferred pensioners”, i.e. members of DB pension schemes who have left pensionable service, but whose pensions are not yet in payment (e.g. because they are still below the scheme’s normal retirement age).
Thus, a buy-in policy is essentially a long-term investment made by the trustees, as an alternative to investing in government bonds (“gilts”), corporate bonds, property, or equities (“shares”). This investment belongs to the trustees on behalf of the scheme as whole – not to the individual members on which it is based.
The scheme’s trustees remain responsible for paying each member’s benefits.
What is a “buyout” policy?
A buyout policy is a contract between each individual former member of a DB pension scheme and an insurance company. Once a buyout policy has been secured, the scheme’s trustees will no longer be responsible for paying the members’ benefits.
Although it is possible to go straight to buyout, it is much more likely that individual buyout policies will be spawned from the conversion of one or more buy-in policies.
It is only when the conversion to buyout has taken place that the insurance contract is assigned to individual members – each member becomes a policyholder. Until then, the policy remains in the name of the trustees.
What is behind the trend to buy-in and buyout?
The trustees of funded private-sector DB schemes, and the sponsoring employers of those schemes, face various uncertainties and risks in trying to deliver the benefits “promised” to the scheme’s members under the scheme’s rules. These include investment risks, inflation risks and longevity risks (i.e. the risk that members live longer than expected).
For much of the past 25 years or so, the risks and costs have been increasing, requiring the sponsoring employers to increase their contributions – often very significantly. As such, employers have been trying to terminate or “wind up” their DB schemes once they are sufficiently funded to avoid further costs. Recent financial conditions, with higher long-term interest rates, mean that many schemes are now able to wind up, leading to a big increase in schemes investigating buy-ins and buyouts.
By taking out a buy-in policy, most risks are passed over to the insurance company (for a price). However, certain risks will remain with the trustees and sponsoring employer, such as the risk of politicians or the courts changing or re-interpreting legislative requirements that apply to occupational DB pension schemes. The trustees and sponsoring employer are only free of these risks once individual buyout policies have been secured and the scheme itself has been wound up.
The buy-in process
Supported by an array of advisers (including actuaries and pension lawyers), and typically in consultation with the sponsoring employer, the trustees of a DB pension scheme will usually start the process by inviting a selection of insurance companies to provide a quote for a buy-in policy – there are currently about 10 players in the bulk annuity market. This will involve giving those insurers the scheme’s rules and relevant membership data, for example. The insurance companies will be given just a few weeks in which to “crunch the numbers”, and some may decline to quote.
Negotiations may follow over the policy terms offered by each insurance company that quoted before the trustees select which one to go with. Normally, only once the trustees have signed on the dotted line will any public announcement be made.
Crucially, the scheme’s members may not be aware of the buy-in until it has happened, but that’s because nothing will change for them in the short term. It is simply an investment decision made by the trustees, which has no immediate bearing on their DB pensions.
Moving to buyout
Many DB pension schemes will continue to operate as normal for a number of years even though the trustees have secured a buy-in policy. There are various reasons why this may be the case, which include:
- There may still be a few scheme members who are employed by the sponsoring employer and are either still building up pension benefits in the scheme (“active members”), or whose benefits continue to be linked to their current salary (often referred to as “active deferreds”). Such members are unlikely to be included within the initial buy-in policy and a further buy-in will be needed when they have all retired, left service or died.
- Very large pension schemes are likely to obtain buy-in policies in bite-size “tranches” – e.g. covering only certain sections of the scheme at a time.
- The scheme may have certain discretionary practices (e.g. as regards discretionary pension increases) that cannot be replicated in an insurance contract.
Even where there are no such obstacles to resolve, it will typically take at least a year or two from the initial buy-in to move on to full buyout.
A frequent reason for this delay is that the insurance company will insist on the trustees undertaking a full “data cleanse” and “data audit”, which seek to ensure that the scheme’s administration records are as accurate as possible, and the correct benefits are being paid, before they are taken over by the insurer. This includes any “rectification” required to ensure that any past under or over-payment of pension benefits has been corrected, particularly arising from discrepancies in Guaranteed Minimum Pension (GMP) data, where the scheme was “contracted out” of the earnings-related part of the pre-2016 state pension system. Specialists in cleansing and auditing pension scheme data are often brought in for this exercise.
Also, the insurance company will want to ensure that the scheme is fully compliant with all legislation requiring the removal of any sex-discrimination, such as regards “GMP equalisation”.
Only when the insurance company has mitigated all potential claims against it (or has agreed an additional premium with the trustees to cover any remaining risks) will it be prepared to issue individual buyout policies.
Implications for sharing pensions on divorce
The most fundamental implication for pension sharing (or, indeed, pension attachment):
A pension sharing order (PSO) made against a DB pension scheme will be ineffective if the member’s benefits have been bought out with an insurance company. This is because the pension is now being provided by a different pension arrangement. In such circumstances, the PSO must be made against the member’s specific buyout policy.
It is thus vital that the divorcing parties and/or their solicitors ask questions about the timing of the move from buy-in to buyout and plan accordingly, where a DB pension is in a scheme that has already embarked on this journey.
Other implications are more subtle:
- At some stage between buy-in and buyout, the day-to-day administration of the pension scheme will be moved over to the insurance company (if it is not already with the insurer). As with any change in administrators, this can cause a hiatus lasting a few months, during which it can be difficult or even impossible to obtain details of a member’s benefits and, in particular, a CETV statement.
- There may be an impact on “scheme factors”, such as those used for the commutation of pension into a lump sum at retirement, on early or late retirement, and for CETVs. These are likely to transition from being set by the trustees on the advice of the scheme’s actuary to them being aligned with those used by the insurance company. This, for example, can lead to a significant increase in the CETV that will be calculated when a PSO is implemented, particularly if the PSO is implemented post-buyout. Where pension sharing has to be implemented externally, this can make a significant difference to the pension credit received by the member’s former spouse/partner and hence to the sharing that would lead to a fair division of pensions between the parties.
- As full buyout approaches, it is possible that the member’s benefits will receive some form of uplift or augmentation arising from a distribution of surplus scheme assets (some of which is also likely to go back to the sponsoring employer). A recent example of this is Legal & General’s full buyout of the British Steel Pension Scheme, which was completed on 31 March 2026 – interim top-up pensions were awarded by the trustee some time beforehand, with final top-ups being made just before buyout policies were issued to the individual members.
In light of such issues, the divorcing parties and/or solicitors may wish to take a keen interest in all announcements made by the trustees of any DB scheme that is going through the buy-in/buyout process and of which at least one of the parties is a member, whether or not it is likely that the relevant member’s pension will be shared with the other party.
What does this mean in practice?
How do I find out whether a client’s DB pension scheme is going through a buy-in or buyout?
Ask the trustees or the scheme’s administration team.
What should I do if I discover a client’s pension is moving towards buyout during divorce proceedings?
Obtain as much information as possible about when buyout is expected to occur and whether there is likely to be any benefit augmentation from a distribution of surplus assets. Ensure your Excalibur Expert is made aware of this.
Could a buy-in or buyout affect the pension valuation or the outcome of pension sharing?
Yes. Once the CETVs offered by a DB scheme that has a buy-in policy are being calculated by the insurance company, they are likely to be higher (potentially significantly so) than if they were still being calculated by the scheme. This means the external pension credit available to the scheme’s member’s former spouse/partner will likely be higher than before, which will affect the pension sharing required to achieve equality of incomes (or values). However, there would not necessarily be a change in CETVs immediately before and after buyout, if CETVs were already being calculated by the insurer.
A buy-in or buyout is less likely to affect offset values, as these are assessed on the expert’s assumptions and not those used in the CETV calculation. However, if there is a surplus leading to enhanced benefits, offset values are likely to increase.
When should I seek specialist actuarial advice?
Whenever one of the divorcing parties has a (non-trivial) DB pension in a scheme that is going through the buy-in and buyout process.
What happens if a pension sharing order (PSO) names the DB scheme, but the member’s benefits are bought out before it is implemented?
The PSO will be ineffective. You will need to return to court to obtain a PSO that names the member’s buyout policy. (This is one of the many reasons why a PSO should be obtained and implemented without undue delay after receiving the pension sharing report from your Excalibur Expert.)
Do the same issues apply if my client’s pension is in a Pension Protection Fund (PPF) assessment period?
This depends fundamentally on whether the scheme ends up going into the PPF. If it does go into the PPF, the member will receive “compensation” from the PPF, which will be subject to the PPF’s internal “compensation sharing”. Otherwise, the members’ benefits will be bought out at a higher level, but only to the extent that can be afforded by the scheme’s assets, together with any monies that can be recovered from the sponsoring employer.
Gary Tansley
Fellow of the Institute and Faculty of Actuaries
gtansley@excaliburactuaries.co.uk
Gary is an actuary at Excalibur Actuaries with over 30 years’ experience advising private and public sector pension schemes and their sponsors. His career has included roles in consultancy, the Government Actuary’s Department and Aviva, where he was closely involved in analysing a £1.75 billion buy-in transaction involving Aviva’s main staff pension scheme.