Aviva opens up the buyout game with delayed pensioner payments

By listening to and understanding their objectives, we can offer flexible solutions to meet their needs. This has the twin benefits of solving a problem for the client and giving us valuable insight into what will be useful for others.

Faced with an employer with a defined benefit pension scheme in deficit, on a buyout basis, we developed a new buy-in product we believe will work for many schemes.

Simple, but effective

The simple solution we’ve come up with provides a real option for companies who want to de-risk now but spread the cost over a number of years.

Our approach sees the employer committing to make contributions based on pensioner payroll payments for a number of years. The trustees pay the scheme’s assets to Aviva and, in return, we issue a bulk annuity policy covering all payments that fall outside the employer’s commitment (including those for deferred pensioners). In essence, the scheme has swapped its key risks (investment, longevity and inflation) for the liabilities covered by the policy.

Spreading the cost

To be clear, the overall cost to the scheme and the employer remains the same. What we’ve done is structure the buyout in a more affordable way.

With a traditional buyout, the employer would face two choices:

• Fund the full cost of the buyout now, or

• Defer all or part of the buyout until it has paid the additional contributions.

However, this leaves the employer open to adverse investment, longevity and inflation experience over the short term, plus uncertainty over the ultimate cost.

We believe this delayed pensioner payment approach could work for many deals in the bulk buyout market. We think it will appeal to schemes, who:

• Want to remove the bulk of their pension scheme risk, and

• Would rather spread the cost over a period of time than commit to a larger payment at the start.

The delayed pensioner payments option offers trustees and employers a way of spreading the cost of de-risking a defined benefit pension scheme.

Nick Johnson, Aviva’s distribution director for defined benefit risk management, says: “We understand that for many trustees an affordable price is just one requirement for a successful transaction. In every tender, we look to understand the context in which the trustees and employer are operating and, wherever possible, provide a flexible and innovative de-risking solution to meet their needs”.