Interest in transferring pension risk off their balance sheets and on to insurance companies appear to be accelerating among U.S. defined benefit (DB) retirement plan sponsors, according to a recent poll conducted by insurer MetLife. The poll’s results lead MetLife to predict 2017 will be “another very robust year of [pension risk transfer] market activity.”
In 2016, there was nearly $14 billion in annuity buyout-related pension risk transfers, based on LIMRA Group data from the fourth quarter of last year, and nine in 10 plan sponsors in the MetLife poll said they believe the level this year will be at least—or more—active. Of that sampling of plan sponsors, 63% said the volume of pension risk buyouts in 2017 will be heavier than in 2016.
What are the Catalysts?
A number of catalysts are leading many DB plan sponsors to continue to take concrete steps to offload their pension liabilities, MetLife said. These liabilities are becoming increasingly difficult for some companies to manage in the current market and regulatory environment.
In the poll, DB plan sponsors were asked to:
- Assess the likelihood they would engage in pension risk transfer to achieve their plans’ “derisking” goals;
- Determine what specific activities they were most likely to use and for which participant populations;
- Understand the current impetus driving interest in pension risk transfer to an insurance company;
- Gauge knowledge about, and preparation for, an eventual pension risk transfer transaction, including interest in flexible transaction structures such as split deals and assets in kind; and
- Probe their expectations for 2017’s level of transfer activity.
Among the top reasons plan sponsors were considering transferring their pension obligations to an insurer were Pension Benefit Guaranty Corporation (PBGC) premium increases, interest rates, and the impact of changes to mortality tables proposed by the Internal Revenue Service (IRS) in 2016 for use in plan years beginning on or after January 1, 2018.
More generally, the respondents also mentioned as triggers for pension risk transfer the regulatory environment and their plan’s funded status reaching a predetermined level. Sixty-four percent expressed concerns about PBGC actions inducing them to shed their pension liabilities.
Pension risk transfers can be undertaken in several ways. One way of reducing pension liabilities is for the plan to pay a lump sum to participants who have not yet begun collecting pension payouts. Another option involves the purchase of a group annuity contract from an insurance company, known as an annuity buyout. This transfers some or all of a DB plan’s benefit obligations and related risks to an insurer (such as MetLife), while retaining all the plan design features and benefits in which the participants are vested.
More than half of the plan sponsors polled said they would be most likely to use an annuity buyout to achieve derisking. Forty-three percent said they would prefer using a combination of a lump sum and annuity buyout. This interest in annuity buyouts rose to 57% from 46% in MetLife’s 2016 poll on the same subject. Providing a lump sum only was chosen by 34% of the plans.
The manufacturing sector is the industry most likely to consider a buyout, MetLife found.
Among those sponsors that expect to use an annuity buyout alone or in combination with a lump sum, 77% said they would considering doing so in the next 2 years.
When selecting an insurer for a pension risk transfer, financial strength of the insurer was the most important factor cited for annuity buyouts. This consideration was followed by the cost of the annuity transaction, and recommendations from their consultant or independent fiduciary.
Just over 60% of plan sponsors polled by MetLife have taken preparatory steps for an eventual pension risk transfer transaction. Up from 45% in 2015. The most common preparatory steps include an evaluation of the financial impact of a transfer, discussions with key stakeholders, data review and cleanup, and exploration of the pension risk transfer methods available in the marketplace.
Retirees Targeted First
Retirees are identified by the plan sponsors as the most common population for which they consider buying annuities, followed by terminated vested participants. Only 22% say they would secure a buyout for all participants, MetLife reported.
Finally, more than two-thirds of the sponsors polled said they are aware that it’s possible to split an annuity buyout transaction among two or more insurers in so-called split deals. Yet only 21% said they would be likely to split the transaction in this way. The largest plans (those with assets of $500 million or more) were the most likely to say they would split a transfer transaction.
The MetLife 2017 Pension Risk Transfer Poll was conducted between late March and early May 2017. There were 129 DB plan sponsors who participated, with 59 percent of those reporting DB plan assets of $500 million or more.
|Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.|