PensionReforms' summary and comments
When an employer wants to stop a Defined Benefit scheme, it can usually call a halt to the accrual of benefits in respect of future service.  That may require compensation in the shape of an alternative Defined Contribution scheme or even, perhaps a change in pay.

There is then the problem of the past.  Those accrued entitlements are normally a formal promise either directly to employees by the employer or indirectly, where the employer more typically promises to pay the balance of the cost of those promises made by a separate Defined Benefit scheme.

"Pension buy-outs" in the United Kingdom used to be reserved for insolvent employers where the employer would no longer be around to meet the balance of the Defined Benefit scheme's promises.  That changed with the introduction of the Pension Protection Fund (PPF) in 2004.  This institution is a bit like the US Pension Benefit Guarantee Corporation (PBGC).

"The newly established PPF took over from insurance companies the task of assuming pensions' assets and obligations when a sponsor failed without enough money to fund 100% of the liability."

The UK industry expected that the arrival of the PPF would mean the end of private buyout providers - seemingly not: "... the UK buyout market, rather than shrinking or even disappearing, surged.  Compared to the £1-2 billion in annual transactional volume that marked the pre-Pensions Act era, the UK market was £8 billion in 2008."

The report aims to understand why this happened and whether there might be lessons in the UK's experience for the US.  The authors talked on a confidential basis to "key stakeholders and decision-makers" in New York, Washington and London, gathering "...observations that underpin this paper's analysis...."

"First, this paper showed that solvent firms, driven by the added burdens created by the 2004 Pensions Act and new accounting rules in 2005, became increasingly interested in offloading their liability.  Seeing this as a potential gold rush, new mono-line insurance companies designed exclusively for buyouts flooded the market with supply.  Consequently, the price of buyouts came down dramatically, making plan sponsors all the more interested in getting rid of the liability."

The UK buy-out market is divided between the "insured" (where life insurance companies 'purchase' the schemes' DB obligations) and the "non-insured" where the obligations are passed, for a fee, to an institution that is not an insurance company.  Apparently, the latter caused controversy as the buyers of the obligations were outside the regulatory controls under which the DB scheme's operated (unlike the insured variety).  The main reason for the initial popularity of the non-insured variety seems to have been speed; they could be organised quickly once the sponsoring employer had made the decision.

The controversy caused trustees to avoid the non-insured market in 2008 but the possibility remains.

"The paper found the outlook for solvent buyouts to be mixed.  Beyond the few transactions in 2007, the non-insured buyout market appears to be stillborn.  However, the experimentation and innovation within the buyout market has continued apace, allowing for ongoing growth in insured buyouts.  Indeed, phased buyouts, bulk transfers, partial-buyouts and especially buy-ins are all bespoke insured buyouts available to plan sponsors that help to circumvent the original insured limitations that led to the non-insured experiments.  As such, while current market conditions are not favorable, the long-term prospects for insured buyouts are quite good.  The increasing burden of the DB pension plan for plan sponsors seems to assure this market's ongoing vibrancy."

DB schemes have become more difficult to manage on a number of fronts (more burdensome reporting requirements, cost, investment returns) so the experience in the US of reducing numbers (see here) is reflected in the UK.  

"In a sense, the rise of solvent buyouts is a direct response to the increasingly burdensome nature of DB pensions.  So while US policymakers perceive buyouts to be a threat to the sustainability of DB pensions, these transactions are perhaps better viewed as an outgrowth of this larger problem."

The UK authorities seemingly see the solvent buyout market as a natural phenomenon whereas the US has a different view:
"In the US, policymakers remain wedded to the idea that DB pensions are salvageable, which narrows their appreciation of the utility of buyouts.  However, the future prospects of plan sponsors with legacy DB liabilities are today tied to the health of their pension plan: a volatile, risky and costly obligation managed by individuals external to the firm.  Viewed in this light, it is possible to see why solvent buyouts have become so popular in the UK and why US interest in such a market is on the rise." 

PensionReforms was struck by one observation about the differences between the two countries:
"Finally, there are clear cultural differences between the two countries, such as the rules-driven approach in the UK and the legalistic approach in the US.  As such, drawing implications for the US from the UK experience is difficult."

That seems to PensionReforms to be more of a similarity than a difference.  

From the unattributed quotes in the report from Washington's lawmakers, it seems that US authorities want to make it as difficult as possible for employers to get rid of their DB obligations.  But they can't really have it both ways.  If compliance issues are making the sponsors' lives difficult regulators must not be surprised at sponsors' reactions.  Trying to limit solvent buyouts seems, to PensionReforms like shutting the stable door after the horse has bolted; that's if we want to encourage the continuation of DB schemes.  PensionReforms is unconvinced about that as a desirable public policy objective. (File size 333KB; 40 pp) 353