The Pensions Act 2004 placed more responsibility on employers to manage and protect their employees’ final salary pension benefits. Many companies welcomed the move, but subsequently found the additional requirements to address shortfalls in scheme funding and regulation an expensive and time-consuming administrative burden. As a result, a growing number of defined benefit pension scheme trustees and sponsors started to choose to transfer the risks associated with their pension schemes to specialist insurers such as the Pension Insurance Corporation (PIC).

The purpose of PIC is to pay the pensions of its policyholders. PIC has guaranteed the benefits of more than 220,000 people and has a portfolio in excess of £40 billion to pay those pensions. In building this track record, PIC has to date, consolidated more than 200 schemes, taking on the obligation to pay the pensions of policyholders who are yet to receive their pension, as well as payments to current pensioners. Clients include Rentokil, Marks & Spencer, the Co-op, Cadbury, The London Stock Exchange and Alliance Healthcare.

The company offers trustees two main options. The first is an insurance policy that transfers the risks associated with paying a percentage of the pensions within the existing scheme. The policy, called a “buy-in”, is held as an asset of the scheme and provides a perfectly matched stream of funding for the insured pensions.

The second is a transaction, known as a buy-out, in which all the assets and liabilities of the scheme are passed to PIC, which takes on all of the risks associated with the future pension payments, and the members become direct annuity policyholders. The sponsoring company, for example Rentokil, is discharged of any further responsibility, or cost, for the scheme, which is wound up. PIC is required by the insurance regulatory framework overseen by the Prudential Regulation Authority (PRA) to ensure that capital is held in excess of those liabilities.

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