In our September 2008 update, we alerted clients to concerns that had been raised by consultants and lawyers about the potential level of protection offered by the Financial Services Compensation Scheme (FSCS).  

Under a buy-out transaction, the scheme’s liability for paying the bought-out benefits is extinguished, the contracts are held in the individual members’ names and the insurer is responsible for paying those member's benefits. Should the insurer fail, the FSCS should provide compensation.  

Concerns were raised about the potential protection from the FSCS in the event that the insurer fails and there has been a buy-in where the annuity is held in the names of the trustees as a general asset of the scheme. It was unclear, if the trustees held the annuity in this way, whether they would be able to take advantage of the FSCS if the insurer collapsed.  

We understand that the FSCS has now confirmed that the scheme trustees, following a buy-in, will get the same protection as would be available in relation to a buy-out.  

The FSCS has also announced plans to begin a consultation on proposed changes to its current compensation coverage of full recompense for the loss of the first £2,000 of any member’s loss and 90 per cent of the remainder. The FSCS suggests that the 100 per cent guarantee on the first £2,000 of each members’ benefits should be replaced with a 90 per cent protection for all benefits.