Employees: brace yourselves for a pension-scheme buyout

Rolls-Royce aircraft engine © Alamy
Engineering giant Rolls-Royce has offloaded pension liabilities

Your company’s final-salary pension scheme could be sold to an insurer. And while the merits of such a deal may not be clear cut, they can have their advantages.

Insurance company Legal & General (L&G) is to take over the pensions of 33,000 members of engineering giant Rolls-Royce’s retirement plan in the biggest-ever deal of its kind agreed in the UK. The pension buyout deal will see £4.6bn of Rolls-Royce pension scheme assets transferred to L&G, which will then be responsible for paying all benefits promised to members.

The deal is the latest in a series of pension buyouts announced by major companies with large final-salary pension schemes, in which members earn guaranteed retirement benefits. The transfers remove what is often companies’ biggest liability from the balance sheet. The cost of meeting pension promises extending decades into the future has been an increasing drag on the finances of many companies.

What’s in it for you?

For pension scheme members, meanwhile, the merits of a buyout deal may seem less clear cut. They move from having their pension looked after by an employer they know and trust to a position where their retirement benefits are managed by an insurance company with which they may have had no previous contact.

However, the deals do offer potential advantages for members, to whom all pension promises must be honoured. Most significantly, as thousands of savers have discovered in recent years, employers standing behind final-salary pension schemes can and do go bust. If there aren’t sufficient assets in the pension scheme to fund benefits, members must fall back on the Pension Protection Fund, which offers compensation in such cases. This can be an unnerving experience, particularly since the PPF caps compensation under certain circumstances.

By contrast, insurers should offer greater security. They manage pension scheme assets on a ring-fenced basis and are closely supervised by financial regulators. A failure wiping out your pension is much less likely. For pension scheme members still working for the sponsoring employer, a buyout may also reduce the risk of the pension scheme itself causing the business financial trouble, and therefore improve their job security. Still, pension scheme trustees should not agree to pension buyout deals without careful scrutiny. Members whose pensions are transferred should expect to receive plenty of information from their schemes explaining the deal and the due diligence that has gone into it. If in doubt, seek further information. Contact the Pension Regulator, which polices final-salary pensions, if your concerns are not allayed.