A Bulk Purchase Annuity [BPA] is a way of removing risks associated with an employer’s defined benefit pension scheme by transferring them to a policy, usually provided by an Insurer. This means that the organisation responsible for some (or all) of a defined benefit pension scheme is changed – a process sometimes called ‘de-risking’.
The BPA provider takes over responsibility for making payments to the members involved. Although there’s only one BPA product, organisations can decide how fully they want to embrace the principle of de-risking. You can remove some or all of the associated risks.
How a buy-in works: These are annuity policies that usually only cover some of your pension scheme liabilities. For example, those associated with your current pensioners who are already receiving their pension payments.
Why choose a buy-in? This type of BPA is sometimes used to remove some of the more expensive elements from an organisation’s scheme – for instance a group of higher paid members could be selected to have their payments made by the BPA provider.
How a buyout works: The scheme’s liabilities are transferred to the insurer, who then takes full responsibility for paying the members. Usually, the original scheme is then wound up.
Why choose a buyout? De-risking a scheme means members are guaranteed to continue receiving their pension payments. The organisation can free up funds used to maintain payments for reinvestment.
One of the main reasons to consider a BPA is to remove some or all of the risk associated with a company pension scheme from its balance sheet. A number of risks are involved in providing a pension scheme.
Longevity – As people live longer, they need to be paid longer. This can severely stretch the resources of the scheme.
Inflation – High inflation means the scheme’s assets could be worth less, affecting ability to pay pensioners.
Investment – It’s hard to predict how the stock market may perform in the future. Poor performance can lead to unexpectedly low returns, potentially causing difficulty in making payments to retired members.
Expense – The costs of administering a scheme may be a factor. Some organisations find it more cost-effective to de-risk their schemes.