Take yourself back to March 2006. A small group of us at LCP was contemplating what the recent launch of a wave of new insurers seeking approval to write bulk annuities could mean for defined benefit (DB) schemes. We saw potential benefit for trustees and sponsors, and so our pension risk transfer practice was born.

Today, we have a thriving market with 10+ insurers and around £40bn of liabilities insured by trustees last year alone. This compares to the position prior to 2006 when there were just two insurers writing about £1bn per year.

The genesis of the new insurers joining the market in 2006 had occurred three years earlier. In June 2003, following scandals where solvent companies walked away from underfunded DB schemes, the UK government ruled that sponsors could only exit their schemes once fully funded on a buyout basis.

The ramifications were long-term and set in stone by the Pensions Act 2004. With few exceptions, most DB schemes at the time faced massive buyout deficits. The new rules of the game were clear: wind-up was only an option once buyout funded.

But back in 2006, we wondered: could there be a win-win for trustees and sponsors utilising these new insurers, even for schemes far from buyout?

We envisioned the extra competition creating an economically priced insurance product that could protect schemes against rising life expectancies – even for just a portion of each scheme’s liabilities – that could serve as a stepping stone to further insurance in the future, with no obligation on when (or even if) future transactions were completed.

The birth of the modern buy-in

There is a strong claim that the first modern partial buy-in was transacted at the end of 2006 by the Hunting Pension Scheme, covering the pensioner liabilities of the scheme. It included specific provisions catering to the Pensions Act 2004, setting the contract apart from previous bulk annuities and allowing it to be treated as an investment for the benefit of all members ahead of any future buyout.

Incidentally, when we helped the Hunting Trustee secure this transaction in 2006, the term buy-in hadn’t been coined at that point!  But the trustees wanted it to be clear that it wasn’t a “buyout” and so when an enlightened trustee who understood the significance of the policy being a trustee investment made the link to carry across the “in” from the word investment into the new term buy-in, the phrase we are all now familiar with was born.

Alongside Hunting’s auditors, we helped to pioneer the framework for recognising buy-ins under the newly introduced FRS17 accounting standard (now IAS19) to avoid a direct profit and loss (P&L) impact. This was key in paving the way for the wave of buy-ins that followed.

An almighty test: the Global Financial Crisis

For the early purchasers of buy-ins, the Global Financial Crisis (GFC) in 2008/09 provided a significant early test, as it did for all financial institutions globally. While some banks faltered, UK insurance companies stood firm. The multiple layers of protection within the insurance regime worked as intended, and helped the UK bulk annuity insurers to weather the storm.