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The Actuary The magazine of the Institute & Faculty of Actuaries

Partially affordable buyouts

I read Jay Shah’s article (‘Affordable buyouts’, August 2006) with great interest. Pensions and insurance actuaries have, for far too long, practised in their separate worlds. Pension buyouts may help to bring us closer together. All the more important, therefore, that we do not mystify each other, and confuse our clients, by using the same words to mean different things. For pensions actuaries, the term ‘buyout’ has been used for many years to mean a complete transfer of a pension fund’s liabilities to an insurance company. What Jay Shah described in his article – the so-called ‘affordable buyouts’ in his title (do I detect the hand of a marketing man here?) – were transfers which would leave residual liabilities to be retained by the pension fund or, more alarmingly, by the members. Perhaps, as actuaries acting in a spirit of openness and transparency in the public interest, we should all agree to call these in future ‘partial buyouts’ or ‘incomplete buyouts’. I suspect some pensions actuaries would consider that a better description, using their own language, would be ‘not really buyouts at all’. Incidentally, if pension fund trustees are looking for partial reinsurance, surely they would prefer to offload the extreme risks. For a cohort of members retiring this year, the trustees may well be able to afford to pay the first, say, 25 years’ pension payments, but would have difficulties if too many members survived beyond 25 years. The solution offered by Jay Shah, to do a partial buyout which leaves the extreme risks with the fund, seems to me to be tackling the wrong end of the problem.