Lucrative pension risk transfer deals aren’t just ballooning in size: They’re evolving to capture constituencies beyond traditional retirees.
Handoffs from employers looking to purge retirement costs by transferring pension liabilities to insurance companies who cover the promised benefits have been going on for decades. Prudential closed its first PRT deal in 1928; the New Jersey-based financial services firm told Bloomberg Law it’s still cutting checks to the two remaining beneficiaries of the Cleveland Public Library transfer today.
Prior to 2012, analysts say, this segment of the market generated maybe $1 billion to $2 billion in transfer deals per year—compared with the $3.1 trillion in total pension liabilities currently shouldered by plan sponsors.
Everything changed once General Motors shed $25 billion in future obligations that winter, sparking a race to “de-risk” that has nearly doubled the revenue stream for group annuity contracts in just a few years (from $13 billion in 2015 to $23 billion in 2017).
But dizzying 10-figure deals are only part of this success story.
A recent $3.8 billion deal between insurer Athene’s not-quite-decade-old PRT arm and pharmaceutical company Bristol-Myers Squibb is stretching the underwriter’s reach by taking on a mix of former workers, current employees, and related beneficiaries. Aon Hewitt senior partner Ari Jacobs suspects there’s no going back now, telling Bloomberg Law he expects to see ambitious competitors angling for “new and complex populations” (read: not just retirees) in 2019.
Industry professionals acknowledged that retirement planning for “deferred lives”—insurance-speak for fully vested employees who remain on the payroll, as well as staff who have left the company but are still owed benefits—is more challenging than catering to retirees.
The difference between maintaining “retired lives” and the deferred camp is having some guideposts (preset payments, fixed addresses) vs. navigating the unknown (calculating future benefits, prolonged administrative costs).
Meanwhile, Pension Rights Center policy director Karen Friedman worries that unsuspecting retirees may get shortchanged along the way.
Room to Grow
LIMRA Secure Retirement Institute analyst Eugene Noble said he expects to see continued growth in the PRT market through 2020.
Key factors contributing to his forecast include:
- Higher premiums imposed on individual employers by the government-backed Pension Benefit Guaranty Corporation (Noble said fees have climbed nearly 500 percent since 2013);
- Rising interest rates (the Federal Reserve has signaled that it’s not done fine-tuning the economy);
- Plan participants living longer;
- The limited impact of President Donald Trump’s corporate tax cuts (“The window to act on that incentive has passed,” Noble said); and,
- Unease about the wildly erratic stock market.
And all that opportunity is undoubtedly going to spur some serious deal-making.
“You’re having more companies step up as major competitors in the PRT market,” he told Bloomberg Law.
Several leaders in the PRT field echoed Noble’s assessment, citing an abundance of financially stable plans—the latest edition of actuarial firm Milliman’s top 100 pensions index shows funding levels hovering above 90 percent—and mounting interest from companies anxious to improve their balance sheets as good signs for the new year.
Wayne Daniel, head of MetLife’s U.S. pension team, said internal polling shows that two out of three plan sponsors are considering going the annuities route. And nearly 70 percent of the interested parties said they’d like to do so within two years.
“It is expected that a significant portion of the $3.1 trillion of defined benefit plan liabilities that have not yet been de-risked will flow through the PRT pipeline over the next decade,” Daniel wrote in an email.
Sean Brennan, head of Athene’s PRT team, said his company sees activity across the spectrum—from the sporadic “jumbo” deals that make headlines (think: Bristol-Myers Squibb) to more common transactions (in the $100 million range) that fly under the radar. And the prospects are only improving each time the Dow takes another tumble.
“The last few weeks have exhibited what plan sponsors fear the most: volatility,” Brennan told Bloomberg Law.
Do Your Homework
Pension watchdog Karen Friedman and Drexel law professor Norman P. Stein have been talking about PRT pitfalls for years.
They’ve warned lawmakers and administration officials about issues ranging from their problem with lump-sum payments (less secure than a lifetime income stream and more confusing) and the loss of federal protections enshrined in the Employee Retirement Income Security Act to concerns about annuitants getting lost in the shuffle (something MetLife copped to earlier this year).
“We’re skeptical about all the de-risking,” Friedman said.
Insurance companies are supposed to provide peace of mind. And that’s exactly what PRT deals do, Prudential risk transfer team leader Scott Kaplan told Bloomberg Law.
“It’s the same exact check that they got from their employer,” Kaplan said. “These people have earned their pension benefit.”
Of course, there are other ways for employers to save money besides nixing their pension plans.
If reopening the entire plan is off the table, Milliman consulting actuary Zorast Wadia said businesses can still make adjustments such as moving assets from stocks to fixed income investments. Because as enticing as it may sound to bail on pension liabilities once and for all, he warned that de-risking is not a sure thing.
“It’s not necessarily something that all companies can do,” Wadia told Bloomberg Law.