Wind-up and buy-out - the cheaper option?

(Jun 18, 2014)

The words "cheap" or "cheaper" are not normally seen in the same sentence as pension scheme wind-up or buy-out.  However, my challenge is whether it is not indeed the cheaper option after taking into account the capitalised costs of running a pension scheme for another 10 or 20 years.

The risk-based Pensions Regulator (TPR) in the U.K. recently completed a survey of the costs of running a defined-benefit (DB) pension scheme.  Average costs were over £1,000 per annum per member for small schemes and only a quarter of that for the largest schemes.  The normal human reaction features words such as "horrendous", "incredible" and "never-ending".  Given the number of ex-employees involved, the typical reaction…

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Tags: buy-out, buy-in

A Second Pension-Scheme Revolution

(Mar 20, 2014)

In his book Unseen Revolution, Peter Drucker drew attention to the structural changes in economic ownership which were silently ushered in with the growth of corporate pension schemes.  Decades later these changes had turned the pension scheme into the dominant item on some companies' balance sheets. Other companies experienced even more dramatic consequences.

However, there is currently a second revolution underway amongst UK pension schemes, at least in the private sector.  This revolution will have a large impact on the corporate landscape.  To illustrate why, we begin with the number of active members of private-sector, defined-benefit pension schemes in the UK, i.e. working people accruing benefits,…

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Tags: pension schemes, bulk annuities, buy-out

Partial buy-outs

(Jul 14, 2009)

It is quite common for a pension scheme to want to reduce its risk, but to be unable to afford a full buy-out.  The question is how best to reduce risk with the funds available, i.e. which liabilities to buy out first.  One argument we have come across is to buy out the older pensioners first, since their life expectancy can be more volatile against your funding assumption.

The answer to this depends on what way you want to measure the risk.  If you are looking at the possible percentage change in life expectancy or reserve, then older pensioners do indeed have a higher volatility: an extra year of life is proportionately larger compared to the baseline life expectancy (similarly for reserves).  Reserve calculations…

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Tags: buy-out, concentration risk, trend risk, tail risk

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