Pension Buyouts: What Can We Learn From The UK Experience?

Ashby Monk

WP#2009-19

Abstract

Managing (or at least slowing) the decline of private defined benefit (DB) pensions has been a top priority for US policymakers. Any market-related developments or regulatory changes that alter the provision or sustainability of private DB pensions in other countries are thus relevant to policy and worth understanding. One such development taking place in the United Kingdom, pension fund buyouts, has enjoyed measured success.

A DB pension bulk buyout refers to a transaction in which a pension plan sponsor pays another company a fee to take over the assets and liabilities of the pension plan. Clearly such transactions are relevant to the provision and long-term sustainability of this institution. So, while the increasing popularity of these transactions is restricted to the UK, the market has garnered the attention of US financial services firms, plan sponsors and policymakers. This paper thus analyzes the growing market for DB pension buyouts in the UK and considers its implications for the US. It contributes to our understanding of the future prospects for employer-sponsored defined benefit pensions, and how they will contribute to retirement income over time.Using various qualitative methodologies, this paper traces the evolution of the buyout from a transaction for insolvent plan sponsors to a transaction for solvent plan sponsors with funded pensions. While certain types of solvent buyouts have fallen out of favor, such as non-insured buyouts, the paper concludes that buyouts of the insured variety have a bright future. The increasingly burdensome nature of the DB pension plan will sustain this market over the long-term.