Buy-ins and buyouts: A solution worth buying in to?

The first pension buy-in transaction in the US took place recently, sparking renewed interest in the strategy. Chris Panteli asks how the market might develop from here

The first pension buy-in transaction in the US took place earlier this year, prompting sponsoring employers to seriously look at the strategy for the first time. However, despite the popularity of risk transfer deals in the UK, the US industry is uncertain how quickly the market will grow on the other side of the Atlantic.

The $75m deal saw the Hickory Springs Manufacturing Company sign on as Prudential’s (known as Pramerica in the UK) inaugural client using its Portfolio Protected Buy-in, the first product of its kind in the US marketplace.

A buy-in works by guaranteeing to meet the pension plan’s liability payments as they fall due. The guarantee is provided by the insurance company in return for a premium and the insurance contract becomes an asset of the pension plan – essentially a match for the benefits covered by the policy.

The plan participants see no change and continue to receive their monthly benefit from the plan administrators. Similarly, from the sponsor’s perspective, the pension funds assets and liabilities remain on the balance sheet.

They differ from the longer-established buyout option because they do not require the closure of the scheme and the employer and trustees retain their responsibilities. Instead, the insurance policy is set up to cover the risks presented by either all the scheme members or by certain subsets, such as retired members.

Growth area
US consultants are bracing themselves for growth in the area, with international firms such as Mercer moving staff who have gained experience in the UK, such as risk consultant Gordon Fletcher, over to the US in preparation.

However, various accounting, legal, valuation and image issues all needed to be overcome before the first deal could be completed. Hickory Spring explored its options for more than a year before signing up.

“The plan sponsor was investigating liability driven investment strategies and became aware of buy-in,” said Prudential senior vice president and head of its pension and structured solutions business, Phil Waldeck. “They worked with a third party consultant placement broker, evaluated LDI strategies, buyouts and buy-ins and given their mix of priorities they decided buy-in was the best set.