Deferred premium: availability and merits

Buying-in with a deferred premium is increasingly recognised as an attractive option for employers keen to de-risk with limited cash outlay upfront.  

11 November 2013

Buying-in with a deferred premium is increasingly recognised as an attractive option for employers keen to de-risk with limited cash outlay upfront.  

Legal & General recently announced its first one.  The deal is a welcome innovation from a leading insurer that is likely to provide a model for other schemes.  

Burges Salmon advised the trustees of the Kenwood Pension Scheme on the transaction.

Benefits were fully insured when the deal was signed but a significant part of the premium was postponed to suit the employer's cash flow requirements.

For an employer with an underfunded scheme the solution is neat:

  • The risk of a deterioration in scheme funding is removed from day one.
  • Less capital is required initially.
  • The deferred premium can be funded like a deficit.  There will be an agreed date for its payment, with interest meanwhile.  The insurer may not insist on interim instalments but the employer is likely to want to make them in order to comply with statutory funding requirements and to cut the interest bill.

From the trustees' point of view, there are no scheme or personal penalties if, in the event, the full premium is not paid because, say, the employer becomes insolvent.  The insurer would simply scale back the benefits it pays to reflect the capital received.

Trustees need to ensure there is a mechanism for them to adjust the insured benefits so they can make payments in accordance with their legal obligations if the scheme goes into PPF assessment or winds up outside the PPF.

For more information, please contact Richard Knight.   

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions
  • Pensions Services
  • Pensions Legal Advice

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