Pension Buy-out - De-risking

How does a pension buy out work?

A pension buy-out has several stages:

Initial situation

If a company has made pension commitments to its employees, it must reflect these in its balance sheet and accrue the corresponding provisions. The provisions to be accrued are determined on the basis of an actuarial interest rate and other parameters, such as inflation or mortality. These pension liabilities can either be assigned to dedicated assets or they are covered by assets in general.

A pension buy-out aims to spin off the pension liabilities from the company and its balance sheet and thus transfer the risks to a so-called pension company.

1) Spin-off

In a first step, the pension liabilities of a company are transferred to a new company – a dedicated pensioner company - together with the assets required to fund them; this spin-off or hive-down is governed by the German Transformation Act (UmwG).

The adequate capitalization of the pensioner company is regulated by German labor law and the associated federal court rulings and has to be based on a conservative view on longevity and discount rates and account for the long-term inflation developments.

2) Acquisition

VEDRA Pensions will subsequently acquire the shares in this limited liability company for a corresponding purchase price and will thus also take over the economic risks and opportunities of the pension company. For the transferring company this means - if structured correctly - an immediate legal and balance sheet de-liability of the pension liabilities (de-risking).

3) Continuation of Operations

VEDRA Pensions invests the capital transferred to the pension company to fund the pension obligations, services current and future pension payments. In the case of the establishment of a trustee, the trustee monitors compliance with the agreed investment guidelines and the corporate governance of the pension company

Our renowned investment committee advises and monitors, especially regarding liquidity management, asset allocation and the selection of investment partners. Our clients and our beneficiaries benefit here from the many years of relevant experience of VEDRA Pension and our carefully selected partners, which we naturally coordinate.

For everyone who wants to know a little more, we are happy to explain the procedure below.

In general, it can be said that there are several ways in which companies have dealt with their pension liabilities up to now:

What are the advantages for the companies?

For companies, a so-called de-risking has more advantages than it may seem at first glance.

After all, for many companies, pension commitments that are structured as defined benefit pension plans represent a major challenge due to the many risks involved, especially financial risks.

These pension risks definitely put a strain on a company's short-term profit and cash flow situation. But they also influence the long-term financial and strategic position of a company.

Again and again we find that they have a negative impact on planned M&A activities and thus deprive companies of needed room for manoeuvre. Outsourcing liabilities or risks to a pension company thus also simplifies corporate transactions and restructuring.

Benefits of a pension risk transfer for companies at a glance

If you have any questions or would like more information, please contact us


Advantages of a transfer for pensioners at a glance




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