The road to buy-out

Abstract

Over the past few years a number of defined-benefit pension scheme sponsors have come to the view that the burden of this commitment is too great. The equity bear market that began in 2001 and which is still with us; the realisation that scheme members are likely to live much longer than previously anticipated; and new accounting rules have all played their part in convincing some scheme sponsors that the most attractive option for them is to have their scheme bought out by a third party. However, the road to buy-out for most schemes is strewn with obstacles. The most notable one is the deficit of assets to liabilities. To make it to their buy-out destination schemes typically either need a massive cash injection from the scheme sponsor, or an investment/contribution plan that would see asset values rise to a sufficient level relative to liabilities at some stage in the future. It is this second route to buy-out that concerns this paper. Here we consider both the likelihood of a typical scheme making it to a funding level where its liabilities could be bought out and quantify some of the factors that might make this more or less likely.