Getting off the hook: Buying-out pension liabilities

Abstract

The trustees of UK occupational pension schemes and sponsoring employers are increasingly considering buying-out pension benefits with insurers. Once the benefits have been bought out, in case the insurer becomes insolvent, it is vital for the trustees to know that they have no further responsibility for those benefits and are discharged from any further liability in respect of them. Otherwise they may find that they have personal liability in respect of the bought-out benefits. Nevertheless, in some circumstances it is unclear whether trustees are free from a residual liability to provide the benefits. The trustees will therefore need to make use of a combination of legal mechanisms, as may suit the particular circumstances of their scheme and the buy-out, in order to ensure that they are discharged from any further liability. Those mechanisms include the statutory discharge under Section 74 of the Pensions Act 1995, insurance cover, exoneration and indemnity provisions in the scheme's trust deed and rules and notices under Section 27 of the Trustee Act 1925.