What happens when your employer sells off your pension?


What happens when your employer sells off your pension?
But what happens to the current and former employees when a firm enters into these 'bulk annuity' deals?

Bulk annuities: a booming market

Last week Legal & General announced that it had agreed a bulk-annuity contract with the pension scheme of automotive supplier TRW Automotive. The deal removes £2.5 billion of liabilities from TRW's balance sheet by insuring over 22,000 of the scheme's pensioners.

The TRW pension scheme currently provides pension benefits to over 46,000 beneficiaries, with assets of £3.5 billion as at March 2014. The scheme was set up in 1928, but has been closed to all future accruals since 2009. In effect, L&G now assumes responsibility for all future pension payouts to past and present scheme members.

It's not the first bulk-annuity deal this year for L&G - it has already written £8.3 billion of annuity transactions so far this year.

De-risking: two types of pension sell-offs

According to Tom McPhail, Head of Pensions Research at financial adviser Hargreaves Lansdown, pension sell-offs (or scheme de-risking) come in two broad forms: buy-ins and buy-outs.

As McPhail explains: "A buy-in involves the scheme trustees working with an insurer to buy a guaranteed income stream from the insurer to meet the scheme's current and future liabilities. The insurer is subject to separate regulatory controls, such as solvency requirements. With a buy-in, the member remains a member of the pension scheme, with all links to the trustees and employer still in place."

So the original sponsoring employer is still responsible if there turns out to be a funding deficit. The employer is essentially buying insurance against its employees living longer than expect.

What about buy-outs?. McPhail says: "A buy-out goes a big step further with de-risking, because it involves transferring the members' rights to a new contract with the insurance company, terminating membership of the original scheme. The member effectively becomes a policyholder of the insurance company."

So the employer completely parts company with its pension scheme, offloading it in its entirety to an insurer or investment firm. For scheme members, this means no more payments from the pension scheme; instead, future benefits are paid directly by the insurer.

Who wins and who loses?

If all goes well, then a pension scheme sell-off makes absolutely no difference to scheme members, as they still get exactly the same pension benefits their employer promised. In fact, as administration is taken over by the insurer there may be improved management and efficiency.

The biggest winner is of course the employer, which gets to shift a giant liability away from its balance sheet.

Pension sell-offs are here to stay

Thanks to a combination of prevailing factors, pension sell-offs are rapidly gaining ground. You have employers fed up with the spiralling cost of funding expensive final-salary pensions and insurance companies desperate to replace lost business with bulk-annuity deals.

With sales of individual annuities having halved since Chancellor George Osborne announced wholesale changes to pension withdrawals in his March Budget, insurers will be looking more and more to bulk annuities to fuel their growth.

Indeed, in this era of ultra-low interest rates and government-bond yields, and with the average UK final salary scheme having a 12% funding shortfall, pension sell-offs are clearly set to boom.

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