Securing a defined benefit (DB) pension scheme through an insurance company is a growing trend that is set to accelerate, research by advisory firm Lane, Clarke and Peacock (LCP) revealed.
The company found that one-in-six members are currently insured, compared to only one-in-10 five years ago.
But LCP believes this is set to rise to around 33% of scheme members receiving backing from insurers by the mid-2020s.
The firm said this will be the case because pensions may not be paid in full if an employer goes bust when there is a deficit in the DB scheme.
Additionally; while the Pension Protection Fund (PPF) provides a safety net in these instances, it does not cover the full value of benefits for all members.
With insolvencies expected to increase in the next year or so, and with thousands of pension schemes currently in deficit, LCP said many savers risk not receiving their pension in full.
Protecting liabilities
That is why many schemes are entering a ‘buy-out’ – a process where “pension promises are passed over to an insurance company”, the firm added.
In 2020 alone, it is estimated that more than £25bn ($33bn, €28bn) will be paid to ‘buy out’ pensions.
The figure also includes ‘buy-in’ options, LCP said, which is an intermediate stage where an insurer underwrites only some of the scheme’s liabilities.
LCP partner and buy-out specialist Imogen Cothay said: “Millions of pension scheme members are blissfully unaware of all the activity that is going on to make sure their pensions are paid in full.
“Whilst most company pension schemes will deliver as planned, there is always an element of risk as, for salary-related schemes, your pension is dependent on your former employer still being in business and able to make up any shortfall in the fund.
“The process of buy-out involves securing pension payments via a deal with an insurance company which should give pension scheme members greater peace of mind.
“We estimate that by the middle of this decade nearly one in three members will have their pensions secured with an insurer. If you receive a letter saying your pension will be paid in future by an insurance company, you should regard this as a positive action providing a safe home for your pension benefits.”
