Up to one million pension scheme members are expected to be in schemes secured by insured buyout firms by the end of 2009. Under a buy-out, 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 members’ benefits. Should the insurer fail, the Financial Services Compensation Scheme (FSCS) should provide compensation.

Lately, concerns have been raised by consultants and lawyers about the potential protection of 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. One view is that it is unclear, if the trustees hold an annuity in this way, whether they would be able to take advantage of the FSCS if the insurer should collapse.

When questioned about these concerns, a spokesman for the Financial Services Authority described eligibility for the FSCS as a “complex issue” and said that compensation was dependent on how the original transaction with the insurer was carried out.

This is obviously an issue of great concern for trustees considering buy-in transactions. We will provide further information in future updates as it becomes available.