How does a pension buy out work?
A pension buy-out has several stages:
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.
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.
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:
On-balance sheet pension liabilities (“Unfunded pension liabilities”)
The first option, still surprisingly often chosen, is to hold pension liabilities on the balance sheet, i.e. without any funds specifically set aside to cover the pensions.
Surprising because this does not involve active risk management, so companies are exposed to the liquidity burden and the underlying risks over the entire course of time.
In addition, risks from the performance of operating assets and the ever-increasing expense associated with the highly complex regulations and their monitoring add up here.
The economic performance of the company must cover these risks and generate and sufficient free cashflow for future pension payments.
Ultimately, companies are not only liable with their entire assets for current and future pension payments, but also assume that cash flows will be sufficient to cover pension payments in the future.
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.
If you have any questions or would like more information, please contact us