DB scheme partial buy-in versus buyout with a weakening sponsor

A buy-in is an asset of the scheme: the insurer pays benefits to the trustee, but the trustee retains legal responsibility for paying members and for the remaining risks. A full buyout transfers the liabilities and assets to the insurer and removes the scheme's risk, but it requires enough assets to pay the insurer's premium. On the figures given, the buyout deficit is INR 6.8 billion against a technical provisions deficit of INR 4.2 billion, so a full buyout needs a further INR 2.6 billion of support. That is likely unaffordable without a large sponsor contribution or a recovery plan that the weakened covenant cannot credibly support.

The partial buy-in covers pensioner liabilities, which are the most predictable and the most exposed to longevity risk. The premium is 105% of technical provisions, so the trustee must check whether the insurer's pricing is reasonable and whether the assets transferred are sufficient. The remaining deferred and active liabilities stay in the scheme, exposed to the sponsor covenant, investment risk and future salary and longevity experience. A seven-year contribution schedule is an unsecured promise from a weakening sponsor. If the sponsor defaults, the scheme bears the loss.

Retaining the risk might allow the scheme to recover through investment returns, but the weak covenant and the dividend request point the other way. A dividend reduces the sponsor's ability to support the scheme and may be contrary to member interests unless offset by additional security. My advice would be that a partial buy-in can be a sensible de-risking step if the pricing is fair and the trustee secures the contribution schedule, but it is not a substitute for addressing the remaining deficit. A full buyout should be tested only if the sponsor can fund the gap. I would not consent to the dividend without a substantial strengthening of the scheme's security.

The trustee board is split between member-nominated and sponsor-appointed trustees. The sponsor-appointed trustees have a conflict because the sponsor wants a dividend and a cheaper funding outcome, while the member-nominated trustees may be focused on removing risk at any cost. The trustee must act in members' best interests, not the sponsor's. The dividend request should be assessed as a separate decision with legal and actuarial advice on its effect on the covenant.

The trustee should:

• Obtain independent legal advice on the buy-in contract, the trustee's responsibilities and the dividend request.
• Obtain independent actuarial advice on the insurer's pricing, the asset transfer, the residual risks and the contribution schedule.
• Consider appointing a specialist independent trustee or a sub-committee to manage the conflict.
• Document the alternatives, including full buyout, partial buy-in, retaining risk and a combination with contingent assets.
• Consult members on any change to investment strategy, as the rules require, and explain the effect on benefits.
• Check whether the regulator should be informed, particularly if the sponsor is in the weaker covenant category and is proposing a dividend.

The process should not be rushed. The trustee should seek a formal covenant assessment, stress test the sponsor's ability to pay the seven-year schedule, and negotiate security such as a parent guarantee or a charge over assets. If the sponsor will not provide security, the trustee should reconsider the partial buy-in and the dividend.

Members should be told four things clearly: what a buy-in is, what changes for them, what does not change, and what risks remain. A buy-in is not a transfer of the scheme to an insurer. The trustee remains responsible, and the insurer reimburses the scheme for the pensioner benefits covered. Benefits already promised are not reduced by the buy-in itself. The security of those benefits depends on the insurer's ability to pay and on the trustee's management of the contract.

Members should not be told that the scheme is 'fully secure' or that all risks have gone. Deferred and active members remain exposed to the sponsor covenant and to future scheme experience. They should be told that the buy-in covers pensioner liabilities, that the remaining scheme continues, and that the trustee will review the position. Avoid jargon such as 'bulk annuity' without explanation. Use worked examples for a typical pensioner and a typical deferred member.

The communication should explain the consultation, the timing, and how members can ask questions. It should be consistent with the formal consultation materials and should not promise future benefit increases. If the dividend is approved, members may ask why the sponsor is paying a dividend while the scheme has a deficit. The trustee should prepare a factual response that explains the covenant assessment and any security obtained. Keep a record of the communications and monitor member queries.