Bulk annuity (buy-in and buy-out)
Pension transfer instrument by which an insurer guarantees a scheme's annuities, as partial (buy-in) or full (buy-out) cover.
Through a bulk annuity, an insurer takes on some or all of a defined-benefit pension scheme's annuities: it is the standard tool of pension risk transfer. It takes two main forms. The buy-in is partial cover: the scheme keeps its obligations toward beneficiaries but buys from the insurer an annuity covering the benefits, the insurance appearing as an asset of the scheme like a matching investment. The buy-out is full cover: the obligations are entirely transferred to the insurer, which becomes directly responsible for paying annuities to beneficiaries, and the scheme can be wound up. The move from buy-in to buy-out marks the final step of de-risking a pension scheme. For the insurer, these transactions concentrate very long-term longevity risk and significant amounts, managed through asset-liability matching and reinsurance. They require fine pricing based on biometric and rate assumptions, on which the profitability of obligations that can run over several decades depends.
The Boots pension scheme transferred roughly 4.8 billion pounds of liabilities through a bulk annuity transaction in November 2023, one of the largest concluded in the United Kingdom market, rising rates having cut the present value of the liabilities and brought the price within reach.
bulk annuity, buy-in, buy-out, bulk purchase annuity
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