Veritas propter investigationem [Truth through research]
TitlePension Buyouts: What Can We Learn From The UK Experience?
AuthorsAshby Monk
InstitutionCenter for Retirement Research
TopicsDefined Benefit schemes
 Pension buy-outs
 Workplace saving schemes
CountryUnited Kingdom
Date Published2009
Date posted on PR17 Feb 2016
Monk, A, (2009). Pension Buyouts: What Can We Learn From The UK Experience? Center for Retirement Research,

PensionReforms’ summary and comments

In the UK, ‘buy-outs’ of Defined Benefit (DB) pension entitlements normally happened when the sponsoring employer went bankrupt.  The scheme’s trustees used what money they had to secure member’s benefits.


That changed in 2004 with the introduction of the ‘Pension Protection Fund’ (PPF) that has some of the characteristics of the US Pension Benefit Guarantee Corporation (PBGC).  Like the PBGC, the PPF provides an underwriting function for bankrupt employers.  However, its unintended influence seems to have been wider.


“… the UK buyout market, rather than shrinking or even disappearing, surged.  Compared to the £1-2 billion in annual transactional volume that marked the pre-Pensions Act era, the UK market was £8 billion in 2008.”


The report tries to explain why.  The first effect of the new arrangement was to provoke the firms with DB schemes to work out how to cap their obligations.  The more onerous regulatory requirements of the Pensions Act 2004 were seemingly the catalyst.


“Seeing this as a potential gold rush, new mono-line insurance companies designed exclusively for buyouts flooded the market with supply.  Consequently, the price of buyouts came down dramatically, making plan sponsors all the more interested in getting rid of the liability.”


The buy-outs were not confined to under-funded schemes.  ‘Solvent buy-outs’ through insurance contracts became common.  “The non-insured buy-out market appears to be still-born.”


“… while current market conditions are not favorable, the long-term prospects for insured buyouts are quite good.  The increasing burden of the DB pension plan for plan sponsors seems to assure this market’s ongoing vibrancy.”


PensionReforms understands the concerns of employers as they face increasingly uncertain times and greater regulatory oversight of DB schemes.  The report suggests there are lessons in the UK’s experience for the US:

“Simply put, DB plan sponsors in both the UK and US are increasingly struggling to reconcile competitive pressures with the provision of DB pensions.  In the UK, buyouts are an option for plan sponsors to manage this burden.  In the US, policymakers remain wedded to the idea that DB pensions are salvageable, which narrows their appreciation of the utility of buyouts.”


The report suggests that US interest in pension buy-outs is on the rise for much the same reasons as they have become popular in the UK.  The number of DB schemes is plummeting in the US (down from 114,000 in 1985 to 30,000 in 2007).


PensionReforms thinks this is a natural progression that will see the demise of DB occupational schemes in the private sector and, eventually, in the public sector as well.  If employers really thought through the remuneration issues associated with DB schemes, particularly of the voluntary variety, they should find it hard to justify maintaining a DB scheme, except as a legacy arrangement. (File size KB; 40 pp) 718