Standard Life Investments

Inside Global Insurance Investment

Buy-out aware investment strategies for Defined Benefit (DB) pension funds

The ultimate aim of many UK DB pension schemes is to have sufficient assets to fund the buy-out of their liabilities by an insurance company.

March 2017

The ultimate aim of many UK DB pension schemes is to have sufficient assets to fund the buy-out of their liabilities by an insurance company. This has given rise to the idea of a ‘buy-out aware’ investment strategy. Such a strategy might have two objectives. Firstly, to ‘hedge’ the insurers’ buyout pricing basis and secondly to build a portfolio that may be used in a cost-effective, in specie transfer to the insurer in the event of buy-out.

Meeting both these objectives would likely require a portfolio specifically aligned with the regulations by which buy-out insurance firms must abide, in particular, Solvency II’s Matching Adjustment (MA). In essence, this would entail running an MA insurance asset strategy for a pension fund. Recent improvements in DB funding levels may make such an approach increasingly viable for a number of major pension schemes.