Should DB Schemes buy into the case for buy-ins?

As defined benefit (DB) pension schemes mature and become better funded, they are increasingly looking to insurance solutions to help them de-risk. Three common solutions are:

• Buyout: the scheme pays a premium to an insurer, which takes ownership of a portion of the scheme’s assets as well as the liability of being responsible for paying the pensions of the scheme’s insured members
• Buy-in: similar to a buyout, but having been paid a premium by the scheme the insurer makes payments to the scheme, which pays the members in turn. The trustees treat their insurance policy as another asset
• Longevity swap: the scheme transfers the risk of paying for its pensioners living longer than expected to a counterparty in the form of a commitment to exchange payments throughout the term of a swap.

In this paper we focus on buy-ins, whose key benefit is that they remove all the risks of those members covered by the policy. These include investment risk, re-investment risk, rates and inflation risk and longevity risk.