GLOBAL - Multinational companies are starting to use buy-ins and buyouts for their smaller pension funds dotted around the globe, Yvan Legris, UK and EMEA chief executive at Aon Hewitt said.
Speaking to Global Pensions, he said the approach is often used as a governance tool to make the impact of smaller funds more manageable. Traditionally, buy-ins and buyouts have been viewed purely as a risk-management tool.
Legris (pictured) said a small number of clients have already done this, but that discussions surrounding buy-ins and buyouts are increasing among multinationals. He declined to name the clients that have already used the approach.
"If you think of the history of how companies grow and become who they are, there are lots of acquisitions. So you could find that in a given country there are four main pension plans and 20 other smaller arrangements. They may not have any active members in them, but you're paying out a pension," said Legris.
In one case, he said he spoke to a global benefit director with 400 pension schemes worldwide, even though the company was only active in 100 countries. "So there's a lot of pressure to say, ‘Can we tidy this up,'" said Legris.
A buyout involves the trustees or plan sponsor of a defined benefit pension plan transferring the risks of the scheme to an insurance company in return for the payment of a premium. An insurance policy is purchased in the trustees' name, and the insurer is responsible for paying benefits. With a buy-in, an insurance policy is set up to cover the risks presented by either all members or by certain subsets and the employer and trustees retain their responsibilities.
The de-risking market - including buy-ins, buyouts and longevity swaps - has soared in the UK. Last month, Hymans Robertson predicted the pension de-risking market would grow another £20bn ($32.5bn) in the next 18 months, on top of the £30bn in deal flow already completed. (Global Pensions; 21 March 2011)
But the market is expected to expand to areas where regulations are putting a strain on how companies fund pension plans or where companies have faced extreme funding volatility, like in the US. (Global Pensions; 8 March 2011)
The impetus behind multinationals entering the market has been more transparency around exactly what provisions they are offering around the world.
Legris added: "Five years ago if you asked most multinationals, ‘Are you sure you know what arrangements you have around the world?' The answer would have been, ‘No, I'm sure I don't know.' But we have a powerful inventory tool that has helped our clients become aware of the problem."
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