Lucida PLC

A "buyout" or "bulk buyout" as it is sometimes known involves the trustees of a defined benefit pension scheme transferring the risks of the scheme to an insurance company in return for the payment of a premium. Buyouts normally involve a three-stage process:

1. An insurance policy is purchased in the trustees' name. The liabilities of the scheme are then insured, but the trustees and employer continue to have legal responsibility for the scheme. From that point on the insurer has responsibility for paying pensioner benefits.
2. The scheme winds up. This can take several years, especially if the member data is incomplete. However, with good project management, this process can be completed within a year. The trustees can then be properly discharged of their responsibilities.
3. The trustees' insurance policy is replaced by individual policies in the members' names and those members become policyholders with the insurer. The trustees and employer then have no further responsibility for the scheme, and the insurer takes full responsibility for the payment of benefits to scheme members.

The key difference between a buy-in and a buyout is that a buy-in does not involve the closure of the scheme or the trustees and employer transferring their responsibilities to the insurer. A buy-in involves an insurance policy being set up to cover the risks presented by either all the scheme members or by certain subsets of members where a partial buy-in is used.

Many employers are considering moving schemes to an FSA regulated insurer because the risks and costs they face in running the existing schemes are becoming unacceptably high. This can be the result of a combination of factors including; the fact that people are living longer (and therefore the scheme will have to pay out more money), investment conditions have been difficult - resulting in scheme deficits and regulation continues to change all of which have added to the costs and administrative burden of running the scheme.

Through a buyout, trustees and employers can remove these problems whilst also ensuring that the interests of the scheme members are protected if not improved.

In reality, it will have very little effect on you. You will enjoy the same or equivalent benefits and entitlements. It is just that these will be provided in future by an insurance company rather than your employer's scheme.

Given that the future of the scheme will no longer be tied into the success or otherwise of your employer, and because all the liabilities of the scheme are fully insured, you could enjoy greater security and less risk than had the scheme stayed as it was.

Insurance through a buyout helps to guarantee member benefits will be paid. Payment of benefits by a defined benefit scheme is dependent upon the scheme's funding and on the strength of the employer covenant. Contrary to popular belief, payment is not guaranteed.

By covering this risk with an insurance policy, whether as part of a full buyout or just a buy-in of insurance, your pension scheme no longer has to worry about finding the extra money, as the insurance policy will provide it.

If your scheme is to be bought-out, you will be informed in advance by the trustees running your scheme. They will provide details of who is going to insure the scheme and provide your benefits in future, when this will happen and how precisely it will affect you. They will also be available for any further questions you may have.

If the scheme instead buys insurance from a provider under 'buy-in' this might not be communicated to you in advance. A buy-in involves an insurance policy being set up to cover the risks presented by either all the scheme members or by certain subsets of members where a partial buy-in is used.

Lucida is a highly secure, strongly backed insurance company focused totally on the specialist area of risk reduction and buyout of defined benefit pension schemes. Lucida is committed to helping your scheme find the best solution to its challenges, whether that is a full buyout or some other risk reduction method.

Where a full buyout is involved, you will have the peace of mind of knowing your benefits are fully insured and will be delivered by a company that takes pride in its excellent customer service as one of its unique features.

As people are living longer and longer these days, and the trend is set to continue into the future, defined benefit pension schemes face increasing costs. These increases arise simply because when someone lives longer than the scheme had originally estimated; it has to find more money to pay out the member's benefits over a longer time period.

By covering this risk with an insurance policy, whether as part of a full buyout or just a buy-in of insurance, your pension scheme no longer has to worry about finding the extra money, as the insurance policy will provide it.

Some schemes decide to buyout only part of the scheme, which could be older pensioners, all pensioners or certain deferred members. Phased buyout may start with older pensioners, while the trustees contract to transfer the remaining members over a number of years. In some cases, trustees insure longevity risk, for example, to limit the duration of pensions paid from the fund.