De-Risking: Buy-in and Buy-out Annuities

Due to the increase in funded position of many plans, employers are often looking for ways to shift the risk off of their balance sheets.  One method employers are considering is purchasing annuities.  There are two types of purchases, buy-out and buy-in purchases.

Buy-out Annuities

Most employers are familiar with the idea of purchasing annuities from an insurance company.   With the buy-out annuity concept, pension plan assets and liabilities are transferred to the insurer for a single premium.  The insurer is responsible for administering and paying the retiree benefits.  The insurer assumes the longevity and investment risk.

With a buy-out annuity purchases, depending on the jurisdiction of the plan, there may be an additional contribution needed to the pension plan (example are Federally regulated plans – the solvency ratio must not be reduced following the purchase).  There could also be an accounting impact such as a settlement charge in the income statement.

Buy-in Annuities 

With a buy-in annuity, the purchase is structured as an investment of the pension plan.  As with the buy-out annuity purchase, the longevity and investment risk is also transferred to the insurer.  In this case though, the employer maintains the responsibility for administration and paying the retirees from the pension fund, and is reimbursed monthly by the insurance company.  This type of annuity can be converted to a buy-out annuity.  Because of the structure of the buy-in annuities, the cash and accounting effects that often appear with the buy-out annuities are deferred or mitigated.

Small firm attention to clients in the boradroom at Mondelis Actuarial.

A limited number of insurance companies offer buy-in annuity contracts and purchase may be a challenge for small contracts, especially in a busy market.Many of the regulators have guidelines with respect to buy-in and buy-out annuities.  These guidelines should be reviewed when considering purchasing a buy-in annuity as they are not all the same.

If you require more information on Buy-in and Buy-out Annuities in regards to your specific situation, the Mondelis team is happy to help you discuss your options. 

Contact Mondelis today to learn more!