Pension buy-outs: issuing individual policies using assignment before winding up

With many UK occupational defined benefit (DB) pension schemes having gone through the process to buy-in part or all of their membership, trustees need to ensure that the process of issuing individual policies to members runs smoothly and as intended during the buy-out and wind-up stages.

Different legal mechanisms can be used to give effect to a pension buy-out. The assignment mechanism is an increasingly popular option. It is essential for trustees to understand how this works and why it is now commonly used in practice. 

Different legal structures to effect a buy-out

The process of moving to buy-out comes after the trustees have purchased buy-in policies, also known as “bulk annuities”, for their membership, the scheme’s data has been fully cleansed, and any knotty data or benefit issues have been worked through. The trustees are then ready to pass full responsibility to the insurer for managing member benefits going forward.

To achieve buy-out, the trustees’ buy-in policy with the insurer is “fragmented” into individual policies between each insured member and the insurer. This is a direct contract between the member and the insurer, through which the member has direct recourse in respect of their benefits.

A buy-out can be implemented using different legal structures, with the two main options being the conventional route and the assignment route.

The conventional route is to simply ask the insurer to issue individual policies directly to members. But this approach gives rise to concerns around two issues. The first issue relates to the eligibility of overseas members to benefit under the current rules of the Financial Services Compensation Scheme, and the second issue is about whether certain pensioner members with fixed protection against certain tax allowances may lose this protection. Some insurers may also have concerns about the extent of their regulatory permissions to issue individual policies directly to members resident in certain jurisdictions.

An assignment structure can help to reduce these risks, as the individual policies are initially issued or established in the trustees’ own name, before being assigned by the trustees to the members. The buy-out is completed when the assignment takes effect. 

There are also different ways of establishing individual policies. Hard copies or full electronic copies can be prepared, but this takes time, particularly when buying-out a large population of members. To speed things up, deed polls and issuance agreements can be used – either as part of a conventional buy-out or an assignment structure. 

Deed polls and issuance agreements

These legal documents can be used to record the establishment of individual policies on agreed terms, by reference to the final benefit specification and data file agreed with the insurer for the buy-out. They enable a buy-out to go ahead without having to wait for the insurer to assemble and distribute full policy documents for each individual member, and allow these steps to be completed by the insurer afterwards. This could be helpful if, for example, the sponsor is working towards a particular deadline for accounting reasons.

The legal effect of these documents is similar, but they are structured differently. Issuance agreements are often simple agreements made between the insurer and the trustees, recording the establishment of individual policies by the insurer under the relevant terms of the bulk annuity policy. 

A deed poll involves the insurer entering into a unilateral deed, where it declares in favour of the trustees or beneficiaries that it assumes responsibility for the payment of benefits under individual policies. 

These solutions can be used for both the conventional route, where policies are to be issued directly in members’ own names, and the assignment route, where policies are to be issued in the trustees’ name for onward assignment to members.  For all non-assignment routes, the buy-out completes once the insurer signs the deed poll establishing individual policies in members’ names. Where assignment is used alongside the deed poll route, the deed poll establishes individual policies in the trustees’ name but the buy-out won’t complete until the trustees assign those policies to the members.

The benefits of assignment

There are three main benefits of using assignment and it is becoming a much more common method used in practice.

Financial Services Compensation Scheme

Members who are resident overseas might not qualify for protection under the current rules of the Financial Services Compensation Scheme (FSCS) if individual policies are issued to them directly, as regulators may be more likely to conclude that the insurance risk is “situated” in the overseas territory. This risk is generally considered to be reduced if the policies are initially issued in the name of the UK pension scheme trustees before being assigned to the members.

The Prudential Regulation Authority (PRA) published a consultation paper in April 2024 proposing a new rule to clarify where the risk is situated when individual annuity policies are issued on buy-out. It proposes that the habitual residence of an individual at the date they joined a pension scheme is relevant in determining whether an individual annuity issued on buy-out is protected by the FSCS. The PRA's intention appears to be to provide further clarity and comfort about the protection of members who were originally habitually resident in the UK but, if implemented as proposed, its new rule would give rise to certain difficulties - in particular, the practical difficulty of ascertaining whether any particular member was habitually resident in the UK when they first joined the scheme, as schemes may be unlikely to hold this data.

There is a proposal to implement these changes by the end of 2024, but it remains to be seen whether any further adjustments to the proposals will be made following the end of the consultation process on 30 May.

Whilst the two-stage assignment process should remain effective to reduce the risk of loss of eligibility for the FSCS and is a recognised way of proceeding within the industry, the position has never been tested in practice. It is also unclear whether the new rules proposed by the PRA could undermine the effectiveness of this structure.

Fixed protection

Assignment is also considered to reduce the risk of certain pensioners losing fixed protection against tax allowances which apply when taking lump sums from their pension arrangements. This is because if individual policies are issued to this group of members directly, HMRC's view is that this could amount to a "transfer out”, which is one of the ways that fixed protection can be lost.  Although the Lifetime Allowance was abolished from 6 April 2024, this will continue to be a relevant consideration for trustees and beneficiaries. In practice, this risk should only impact members who applied for fixed protection on or after 15 March 2023.

Insurer's regulatory permissions

Assignment is helpful where insurers have any concerns about the extent of their regulatory permissions to issue individual policies directly to members resident in certain jurisdictions. The assignment mechanism addresses these concerns because the individual policies will be issued to a UK-based trustee body.

In addition to the three main advantages, it is also common for schemes to assign all members’ individual policies, not just for those members who might stand to lose a form of existing protection. This helps to avoid any challenge to the effectiveness of the assignment for the particular members over claims that it could be an assignment “for convenience” and is not a genuine assignment. Insurers have shown increasing preference for this method too, as treating all members the same is more straightforward and avoids the risk of members being placed in the “wrong bucket”.

Documentation for assignment

A buy-out by way of assignment is likely to involve the following legal documents:

• a formal buy-out request or notice which confirms that the relevant conditions for buy-out under the bulk annuity policy have been satisfied;
• an issuance letter or deed poll, under which the insurer establishes individual policies in the trustees’ name by reference to its template individual policy terms and the final benefit specification and data file;
• a deed of assignment, under which the trustees assign those policies to the members; and
• a notice of assignment, confirming to the insurer that the assignment has taken place. 

This list is not exhaustive so the documents which may be required will depend on the circumstances of the scheme and the requirements of the insurer.

This process provides control and visibility over the timing to reach buy-out and within certain regulatory timescales, the hard copy policies can be issued by the insurer. The assignment mechanism can deliver benefits to all stakeholders, as it allows buy-out to be achieved at the appropriate time, enables insurer capacity constraints to be managed and helps reduce the risk of members losing valuable protections.

Timing for issuing individual member policies

Trustees should seek a commitment from the insurer to issue the individual member policies within three months of the assignment taking effect. This is to meet a trustee obligation under the Disclosure Regulations, which requires final information about the benefits secured to be sent to members within three months of the trustees doing what they can to discharge their liability.

Some schemes issue member farewell communications in the run up to assignment to notify members to expect a communication from the insurer and to contact the insurer if this does not arrive by a certain date. This can help prepare members for the transition and ensure that they do receive their individual policy as anticipated.

Read more on pension buy-outs:

• • Pension buy-outs: trustee liability post winding up 
  • Pension buy-outs: claim limitation periods post winding-up
  • Pension buy-outs: communicating with members about winding-up
  • Pension buy-outs: concluding the winding-up
  • Pension buy-outs: deciding how to use surplus on winding-up
  • Pension buy-outs: discharging DC assets on winding-up
  • Pension buy-outs: endgame issues for sponsors
  • Pension buy-outs: employer indemnities on winding-up
  • Pension buy-outs: incorporating pension scheme trustees before winding-up
  • Pension buy-outs: making the decision to fully buy-in
  • Pension buy-outs: managing a surplus on winding-up
  • Pension buy-outs: relevance of FCA’s Consumer Duty when winding-up
  • Pension buy-outs: residual risks cover for winding-up pension schemes
  • Pension buy-outs: managing the risk of ‘trapped surplus’ on winding-up