Pension Risk Transfer: Annuity Buy-In or Buy-Out

What is the difference between a pension risk transfer via an annuity “buy-in” or “buy-out?”

With an annuity “buy-in” a plan sponsor purchases one or more group annuity contracts to cover pension obligations with the plan sponsor remaining responsible for making payment to the plan participants.

With an annuity “buy-out” the defined benefit plan sponsor transfers all of its pension liabilities to an insurance company by purchasing a group annuity contract and terminates its defined benefit plan.  A variation on the annuity “buy-out” is the “lift-out” where the plan sponsor purchases an annuity contract to cover the benefits of certain retirees, but other retirees remain covered by the pension plan and the plan is not terminated.

In August 2019, the LIMRA Secure Retirement Institute reported that “buy-ins” totaled more than $880 million in the second quarter of 2019.  “Buy-outs” for the same period  surpassed $4.7 billion.