Pension Buyouts: What Can We Learn from the UK Experience?

Abstract

This paper analyses the UK market for Defined Benefit (DB) pension buyouts and considers its implications for the USA. A DB pension fund buyout refers to a transaction in which a pension plan sponsor pays another company a fee to take over the assets and liabilities of the pension plan. Using various qualitative methodologies, this paper traces the evolution of the buyout from a transaction for insolvent plan sponsors to a transaction for solvent plan sponsors with funded pensions. While certain types of solvent buyouts have fallen out of favour, such as non-insured buyouts, this paper concludes that buyouts of the insured variety have a bright future. The increasingly burdensome nature of the DB pension plan will sustain this market over the long term. As such, this paper contributes to our understanding of the future prospects for employer-sponsored DB pensions, and how they will contribute to retirement income over time.