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Liability Management

Sponsors of DB pension schemes can offer members a range of options regarding the pension benefits they have earned in the scheme, including:

  • Pension Increase Exchange (PIE)
  • Early Retirement (ER)
  • Flexible Retirement Option (FRO)
  • Enhanced Transfer Value (ETV)

Such exercises are now covered by an industry Code of Practice that sets certain minimum standards to protect members’ interests.

Our team has experience advising companies on these options, covering feasibility analysis, offer design and implementation.

We have also developed a new innovative solution for Liability Management which we would be happy to discuss in more detail with companies interested in this area.

Pension Increase Exchange

Under a PIE, pensioner members are offered the option to give up future pension increases in exchange for a higher current pension. For members who are at the point of retirement, the higher starting pension can also allow them to receive a higher tax free cash lump sum.

If inflation-linked pensions are being exchanged for level pensions, the company’s exposure to inflation risk is reduced.

In addition, by bringing forward pension payments and paying out higher lump sums, the pension scheme liabilities are extinguished quicker, and can therefore reduce risk exposure to, for example, interest rate and longevity.

Depending on the financial terms of the offer to members, a PIE can also reduce the cost of funding the scheme and, ultimately, the cost of buying out with an insurer.

Early Retirement

Members who are over their minimum retirement age (typically 55), can be offered enhanced terms (eg lower actuarial reduction than would be applied by the trustees) to commence drawing their pension and tax-free cash lump sum early. This could also be combined with a PIE exercise as described above.

As for a PIE, bringing forward pension payments and paying out lump sums, can reduce pensions risk and costs (particularly for buy-out with an insurer) depending on the terms of the offer.

Flexible Retirement Options

Members who are over their minimum retirement age (typically 55), can be offered the option to transfer the value of their pension out of the scheme and use it to immediately secure a pension (in the form that they choose) in the open market with an insurer.

Members may prefer this open market option rather than receiving a pension from the scheme, as they have flexibility to select the type of pension they will receive and they may be able to take a higher tax free cash lump sum than they would get in the scheme. For example, they can choose a higher starting level pension (as opposed to inflation-linked) and/or a lower or no spouse contingent pension.

The transfer of pensions out of the scheme eliminates all further risk exposure to the sponsor in relation to those pensions. Depending on the terms offered for the transfer, there can be cost savings to the sponsor from this option.

Enhanced Transfer Value

Non-Pensioner members can be offered the option to transfer the value of their pension out of the scheme into another scheme of their choice on enhanced terms.

As above, the transfer of pensions out of the scheme eliminates all further risk exposure to the sponsor in relation to those pensions. Depending on the terms offered for the transfer, there can be cost savings to the sponsor from this option.

Unless enhancements are significant, this option is not expected to be popular with many members as they will bear all future risks relating to their pensions. However, in certain circumstances, this option could be attractive and worth investigating.

Key contact

  • Richard Weisz
    Lead Senior Manager,
    +44 20 7007 2619
  • David Robbins
    Partner,
    +44 20 7007 2810
  • Paul Geeson
    Partner,
    +44 20 7303 0878
  • Tony Clare
    Partner,
    +44 161 455 8392

Find out more

Useful links

  • Meet the team
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  • Contact us
  • Careers
  • Return to Pensions Advisory homepage
  • Return to Actuarial & Pensions homepage

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