Correspondence: Andrew Clare, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, UK. E-mail: A.Clare@city.ac.uk

¹is a senior economist at Fathom Consulting. Andrew began his career at the Bank of England in 1995. He spent a total of 9 years in the Monetary Analysis Divisions of the Bank, including spells as an exchange rate analyst, researching the UK labour market and writing sections of the quarterly Inflation Report. Later he managed a team of analysts conducting research into the money and credit aggregates. Since joining Fathom in 2005, Andrew has worked on a range of consultancy projects across a number of industry sectors.

²is an Associate Dean and holds a chair in Asset Management at the Sir John Cass Business School. Before joining the business school in September 2004, Andrew worked as an economist at Legal & General Investment Management (LGIM), one of the United Kingdom's largest investment managers. While there he was responsible for LGIM's financial market and macroeconomic analysis, the overall investment process was instrumental in the early stages of LGIM's Liability Driven Investment product lines. Prior to this Andrew worked as a senior research manager in the Monetary Analysis wing of the Bank of England, which supports the work of the MPC, where he was responsible for equity market and derivatives research. Andrew is also the Chairman of Fathom, a consultancy that specialises in providing independent, economic and financial market research. He has published extensively in both academic and practitioner journals on a wide range of economic and capital market topics, including pensions.

³joined the Association of British Insurers (ABI) as Director of Research and Chief Economist in 2005, where she is responsible for the research and statistics that the ABI produces. Rebecca is secretary of the Insurance Industry Working Group, which is co-chaired by the Chancellor of the Exchequer and Andrew Moss (CEO, Aviva). She represents the insurance industry on the Secretary of State's Panel for Monitoring the Economy at the Department of Business, Enterprise and Regulatory Reform. She is also Director of the Operational Risk Insurance Consortium (ORIC).

⁴joined the ABI Research Team as Assistant Director, Projects in October 2006. Since May 2008, he is also Head of the ORIC. Mariano joined the ABI from the Management Department of the London School of Economics (LSE), where he is currently a visiting fellow of the LSE Managerial Economics and Strategy Group. He holds a PhD in Economics from the University of Bristol.

Received 18 December 2008; Revised 18 December 2008.

Abstract

Over the past few years a number of defined-benefit pension scheme sponsors have come to the view that the burden of this commitment is too great. The equity bear market that began in 2001 and which is still with us; the realisation that scheme members are likely to live much longer than previously anticipated; and new accounting rules have all played their part in convincing some scheme sponsors that the most attractive option for them is to have their scheme bought out by a third party. However, the road to buy-out for most schemes is strewn with obstacles. The most notable one is the deficit of assets to liabilities. To make it to their buy-out destination schemes typically either need a massive cash injection from the scheme sponsor, or an investment/contribution plan that would see asset values rise to a sufficient level relative to liabilities at some stage in the future. It is this second route to buy-out that concerns this paper. Here we consider both the likelihood of a typical scheme making it to a funding level where its liabilities could be bought out and quantify some of the factors that might make this more or less likely.