The pension risk transfer (PRT) market reached new highs in 2021. According to the Secure Retirement Institute (SRI), U.S. pension buyout and buy-in sales are anticipated to be as high as $40 billion in 2021. Buyout sales reached $15.8 billion in Q3 alone, more than tripling Q3 2020 sales of $4.6 billion. Following a large, single case early in the year, buy-in sales reached $3.5 billion in Q3 2021.
One of the drivers of increased popularity of PRTs is the ability to take long-term financial liability off a plan sponsor’s books, while also saving them a significant amount of money in the short-term. Recurring costs, like administrative, actuarial, recordkeeping and compliance, are reduced or completely removed after a risk transfer buy-out.
This is particularly appealing as plan sponsors continue to contend with the impact of COVID-19. During the height of the pandemic, the funded status of defined benefit (DB) plans deteriorated as interest rates dropped and markets reacted volatilely to the uncertainty of the time. Plan sponsors that reacted to these factors are not as well poised as those that remained calm and maintained equity allocations. The latter group benefited from market growth and in some instances are better funded than before.
Another impact of the pandemic was a slump in PRT activity in 2020. However, as noted, activity rallied in 2021. In fact, 60% of insurance carriers reported year-over-year growth in the PRT market. A unique component of 2021 was the completion of fewer, but larger, transfers. Historically, in the years that follow larger deals, smaller plan sponsors pursue PRTs.
If you are considering a PRT in 2022, whether a large or small transfer, items you should consider include:
Insurers use pricing and interest rate assumptions that are different from what the IRS requires plan sponsors to use when determining a plan’s funded status. The amount of money needed to be in the plan’s trust to be considered fully funded by the IRS may be quite different from the cost to provide a group annuity contract that funds the same benefits.
Also, keep in mind that certain characteristics in a plan or participant population could make settling pension obligations with an insurer more or less costly than estimated. For example, insurers will look at gender, industry, future benefits and type of work (e.g. blue or white collar) to determine the cost of providing a group annuity contract.
Insurers seek precise and robust data when issuing group annuity contracts to ensure their bids are accurately priced. Pertinent data includes information about participants as well as their designated beneficiaries and elected death benefits. Note, insurers no longer accept non-electronic records—everything must be shared digitally.
Borrowing money to finance a PRT might be the right path for plan sponsors in certain instances. Low interest rates are particularly beneficial as it allows the plan sponsors to remove long-term financial liability from their balance sheet and reduce, or even eliminate, expenses. In December, the Federal Reserve alluded to potential rate increases following the record lows of previous years. Consider taking advantage of the current low interest rates before possible hikes in 2022.
Different types of PRTs take different amounts of time to complete. Timing is an important factor when considering a plan termination. Most plans are timed to coincide with the last day of a plan year, which is often December 31st. If you wait till the last quarter of a calendar year, insurers may have limited or no capacity to respond to your request for proposal.
In the case of a plan termination, the plan will need to complete filings with the IRS and PBGC by certain due dates and impacted participants must also receive the required notices in a timely manner. The time added to the length of a plan term transaction to complete the filings will need to be considered at the onset of the process.
There are critical partners necessary to ensure a smooth and seamless PRT. Taking into consideration how these partners contribute and interact before, during and after the process will help define success. Review a list of key partners that would include, but aren’t limited to, annuity placement advisors, recordkeepers, actuaries and legal counsel.