A buy-in is a type of insurance policy whereby a pension scheme insures some or all of its liabilities (future pension payments) with a specialist insurance company. A premium is paid to the insurer and in return, the insurer makes regular payments to the pension scheme in relation to the liabilities covered under the policy that replicate monthly pensions that the scheme pays. 

Under a buy-in, the policy is an asset which belongs to the scheme and is not assigned to individual members. The scheme remains responsible for paying benefits to all members. It does not affect the way in which any members receive their pension, and the pension accrued in the scheme by each member will not change as a result. 

A buy-in is the long-term goal for nearly all defined benefit pension schemes, and many buy-in transactions have been concluded in recent years.

Yes. A buy-in policy does not change the position of any individual members. All members remain members of the Scheme.

The Trustee used the bulk of the Scheme’s assets to purchase the insurance policy and received an extra payment from the Company to help cover the cost of the deal.

Rothesay is a leading UK pensions insurance specialist, purpose-built to protect pensions. It secures pensions for over 840,000 people from schemes sponsored by companies such as Asda, British Airways, the Co-operative Bank, National Grid, Morrisons and the Post Office. Rothesay’s balance sheet strength, expertise and ongoing shareholder support means it is a very good insurance partner for the Scheme.

In most cases, a ‘buy-out’ will happen at some point after a ‘buy-in’. Under a buy-out, a scheme’s liabilities are transferred to the insurer, and the sponsor’s obligation to the Scheme ends. In a buy-out, the insurance policy would effectively be converted into individual annuity policies for each member, and the insurer would take on the direct responsibility for paying members’ benefits.

Now that the buy-in has been completed, Thales and the Trustee will work together over the coming months with an intention to move towards converting the buy-in policy into individual insurance policies for each member (i.e. a ‘buy-out’) at some point in the future. If a buy-out happens, and that is the expectation in our case in due course, the insurance company will assume responsibility for making pension payments directly to members.

A buy-out would not affect the pension benefits you have accrued under the Scheme; it simply means that the obligation to make pension payments rests directly with the insurer rather than the Scheme.

UK insurers are regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), so the Scheme will have the security of an insurance policy that is subject to the strict regulatory regime that governs insurance companies in the UK. In addition to the PRA and FCA regulation, there is also a ‘safety net’ underlying UK regulated insurers, known as the Financial Services Compensation Scheme, which is expected to provide 100% compensation in the unlikely event that an insurer is unable to pay benefits.

By entering into a buy-in policy, the Scheme now owns an investment which provides a better match for the pensions it needs to pay. In particular, the policy will help to protect the Scheme from future changes in life expectancy, and changes in financial conditions, such as long-term interest rates and price inflation. Insuring these risks makes the future costs of running the scheme easier to predict and future funding more stable.

All of the specialist insurers who operate in this area are regulated by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). The PRA requires insurers to hold significant capital reserves to back the policy contracts written. In theory, these reserves should be sufficient to protect the insurer and, by extension, the members of the pension schemes which the insurer covers, against very extreme (‘1 in 200’) adverse events.

Thales, on the other hand, has no requirement to hold such reserves. If Thales was unable to meet its pension scheme obligations to the Scheme, the Scheme might (depending on its funding level at the time) be taken over by the Pension Protection Fund (PPF). The PPF pays compensation to pension scheme members in the event that their sponsoring employer becomes insolvent, but there are limits on the compensation that the PPF pays.

The buy-in policy helps to remove the risk to Thales of further rising pension costs, by paying the insurer to take on the risks noted above. Thales considers that concluding the buy-in allows its business to focus on sustainable growth, to the benefit of all of its people, its customers and its stakeholders.

No. It is simply a different form of investment for the Scheme. Arrangements with Thales will remain unchanged for the time being and, importantly, Thales will continue to support the Scheme, as required.

Yes, deferred members will continue to have the same option to transfer out of the Scheme as they had before the buy-in.

Actuarial factors, such as those used for commutation and early or late retirement, are mostly set at the discretion of the Trustee or both the Trustee and Company. This means that they change from time to time, following review. That will continue to be the case after the buy-in. It has been agreed that for a period after buy-in, the factors used will be those determined by the Trustee or Trustee and Company, as relevant. After that transition period, the factors will be set by Rothesay using their standard approach, as is usual in these circumstances. Rothesay are likely to review and change the factors more often. It is important to note that Rothesay is bound by a legal requirement to treat customers fairly.

We’ll post further updates on this microsite and write to you again if there are any significant developments. 

If you have a specific question about your pension, please contact the Scheme administrator, EQ Retirement Solutions (formerly known as Equiniti):

Tel: 0203 890 2128
Email: [email protected]
Post: Thales Pensions Team, Equiniti, Sutherland House, Russell Way, Crawley RH10 1UH