UK: Managing Pension Scheme Liabilities - Pensions In 30 Podcasts, Episode 13

In episode 13, we provide an overview of scheme risk management and liability reduction exercises.

Key Points

  • Options range from amending benefits to sophisticated investments
  • The employer needs to consider its duty of good faith

Main Sources

Liability Management

Liability management describes a wide range of actions that trustees and sponsors can take that are intended to reduce the financial risks which a defined benefit occupational pension scheme faces.  Below are some of the most common actions.

Benefit Redesign

Over the last few years one of the most popular ways of reducing the financial risk associated with defined benefit occupational pension schemes has been to close such schemes to new joiners and/or future accrual. The ability to do this depends on the provisions in the scheme's documentation, including, in particular, the amendment power. It will also usually be necessary to consult with scheme members.

A less drastic alternative to closing the scheme is changing the benefit structure for future benefit accrual, for example:

  • by moving to career average or a cash balance type arrangement;
  • by asking members to pay higher contributions; or
  • by putting a cap on the salary which counts towards pension benefits.

Following the decision in IBM v Dalgleish, employers should be conscious of their duty of good faith when redesigning benefits. Whilst the case is very fact specific, it highlights the importance of adopting a proper process.

Enhanced Transfer Value (ETV) exercises

This is where employers offer deferred members an inducement to transfer their benefits out of the scheme (usually to a defined contribution scheme). In the past, the inducement was sometimes a cash payment made directly to the transferring member. However, in the light of the Pensions Regulator's guidance, the inducement now more commonly takes the form of an increased transfer payment paid through the scheme.

Guidance from the Pensions Regulator sets out the issues which trustees should consider if asked by the company to offer ETVs. It is important to take care over these exercises and it would be usual to follow the Guidance closely.

The Government has the power (due to expire in 2020) to make regulations to prohibit incentive exercises, but it has not yet done so. It continues to monitor compliance against the Guidance.

The Industry Code of Good Practice for Incentive Exercises (revised January 2016) should be followed where an ETV exercise is undertaken.

Pension Increase Exchange (PIE)

A PIE is usually designed as an option under scheme rules providing members with an opportunity to give up non-statutory pension increases (for example, increases on pension accrued in excess of Guaranteed Minimum Pension prior to 6 April 1997). In return, the member may receive a cash lump sum or (more commonly now) a different kind of benefit such as a higher initial pension.

Following the introduction of new pension flexibilities, PIE is likely to become a common option available to members reaching retirement, alongside commutation and transfers out.

If the PIE exchange is not an option under the scheme rules that is ordinarily available to members, the Industry Code of Good Practice for Incentive Exercises (revised January 2016) should be followed where a PIE exercise is undertaken.

Asset Backed Contributions (ABC)

Under an ABC, the employer pays a significant additional contribution to a pension scheme on condition that it is used to buy an interest in a special purpose vehicle (SPV). The SPV is typically a Scottish Limited Partnership for specific and important technical reasons, although alternative structures such as Jersey Limited Partnerships can be used instead. It is important that ABCs are structured in such a way so that they comply with the restrictions on employer related investments.

The SPV typically uses the money to acquire an asset (or assets) from the employer which is capable of producing income (such as property or intellectual property rights) and it then leases that asset back to the employer to generate a regular income which the SPV in turn pays to the pension scheme. The "asset" which the pension scheme acquires is the partnership interest, which is valued as the net present value of the future anticipated cash flows that it delivers.

Such arrangements can have an immediate positive impact on a scheme's funding level and can have a cost saving on the Pension Protection Fund levy if certain requirements are met.

ABCs can help the employer to negotiate lower annual pension contributions and give trustees additional assets over which they have access in the event of employer insolvency. Guidance from the Pensions Regulator sets out the issues which trustees should consider if asked by the company to enter into an ABC arrangement.


Cases such as those involving the schemes of Qinetiq and Arcadia have caused many companies to review the rules of their pension schemes to check the precise definition of inflation used for the purposes of calculating increases to pensions for retirees and those pending retirement.

In some instances, it will be possible to change the inflation index which applies from the retail prices index to another index, such as the consumer prices index, which tends to result in lower increases and therefore lower liabilities in the scheme.

However, it will not always be possible to change the index as can be seen by the recent decision in Barnardo's. Each case will turn on the precise wording of the scheme's rules. Even if the scheme rules are drafted in a way that such a change could legally be made, companies are likely to have to make a compelling case to trustees in order to get them to agree to make such a rule change.


A buy-in is an insurance contract which trustees purchase as an asset of the scheme. The contract produces an income stream which is intended to cover the accrued scheme benefits payable to and in respect of certain scheme members. A buy-in will often cover just pensioners but it can cover both pensioners and deferred members.

A buy-in contract can be purchased and held as a long term investment of the scheme or it might be purchased with a view to moving straight to buy-out (see below).

As the buy-in contract is a trustee investment, the trustees need to make sure they have the power to enter into it. They must also obtain written investment advice to confirm that it is a suitable investment for the scheme.

While the buy-in contract is in place, the trustees remain responsible for paying the members' benefits although the intention is usually that the payments from the insurer to the trustees under the buy-in contract will match the payments due to the members covered by that contract under the scheme.

If there is a shortfall between the benefits payable under the buy-in contract and the benefits payable under the scheme, the trustees will be responsible for any such shortfall, unless the trustees purchase additional cover from the insurer (referred to as 'all-risks' cover).

A buy-out is much like a buy-in, except that a buy-out contract is an individual contract between the insurance company and a particular scheme member. The insurance company will be responsible for paying benefits to or in respect of the member and, provided that the buy-out contract meets certain requirements, the trustees will no longer be liable for paying such benefits.

Buy-out contracts are usually purchased as part of the process of winding-up a pension scheme. Trustees might purchase buy-out contracts in the members' names or they might assign the benefit of a buy-in contract to the member.

With a buy-in, the employer remains liable for funding the scheme and the Pension Protection Fund is usually available on the employer's insolvency. In addition, if the insurer who issued a buy-in policy became insolvent, the Financial Services Compensation Scheme (FSCS) would pay compensation to the trustees. Following a buy-out, compensation for any shortfall on the insolvency of the insurer would be under the FSCS only.

Medically underwritten policies are increasing in popularity.  Risk profiles of scheme members can be taken into account and policies tailored either to reflect the membership as a whole or on an individual member basis.

Longevity Swap

These are relatively complex financial instruments and have been used by a few large schemes as means of countering the risk of members living longer than expected. Under a longevity swap, the trustees transfer to the contractual counterparty (some or all of) the risk of increased liabilities arising from increased life expectancy. Swaps operate using a fixed leg and a floating leg.

Trustees make payments to the provider for a specified period based on assumed mortality: this is the fixed leg. In return, the provider pays a cash flow in respect of members covered by the swap contract for the remainder of each such member's life, whether that period is longer or shorter than the specified period (this is the floating leg).

In practice, the parties' opposite payment obligations are "netted off", so only the balance is payable. Longevity swaps can be structured through insurance policies or as a derivative.

Longevity swaps operate over a potentially long time period and if a buy-in or buy-out is anticipated in the future, schemes should think carefully before entering into a longevity swap as to how the swap would interact with, or be replaced by, a subsequent buy-in.

Key issues for trustees to consider are the swap's termination provisions and the likely risk/reward profile of implementing a longevity swap and then a subsequent buy-in, as compared to the corresponding profile for avoiding the longevity swap and moving straight to a buy-in at some time in the future.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
18 Oct 2017, Workshop, London, UK

This practical workshop will take in-house counsel through the life of a brand, providing guidance on issues which regularly arise.

31 Oct 2017, Seminar, Toronto, Canada

Gowling WLG and ACA Aponix have joined forces to provide a practical session for regulated financial services businesses, putting the legal requirements into context and giving you concrete actions.

1 Nov 2017, Seminar, London, UK

Our next ThinkHouse Foundations session has again taken on board your feedback from the last session which means we are turning our attention to employment, cloud and warranties and liabilities.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.