Pension risk transfers (PRTs) are on the rise. And have been. A panel of experts in a recent webinar offered their insights regarding what is behind that, and what factors it may be wise to consider when pondering a PRT.
An expert panel comprised of Greg Cunningham, Senior Sales Executive at the Berwyn Group; Ellen Kleinstuber, Principal and Chief Actuary at Bolton; Travis Jones, Senior Consultant at Aon; and Ruth Schau, Senior Director, Pension Solutions, at Pacific Life, in the May 29 Berwyn Group webinar “Your Checklist for Pension Risk Transfer” noted that more than 800 PRTs took place in 2023.
Last year’s pace of PRTs was a record, according to the panel—and it continues this year. October Three in its May 2024 Annuity Purchase Update concurred, reporting that if the pace of PRTs set in 2024 so far continues, 2024 will be “another record-breaking year” for PRTs.
Why?
Why pursue a PRT? And why is the pace so heavy now?
October Three explains that companies pursue PRTs because they help in reducing administrative fees and liabilities. Kleinstuber said in the webinar that higher interest rates and legislation whose provisions create an environment that encourages PRTs are additional factors that make them attractive.
Premiums charged by the Pension Benefit Guaranty Corporation are another factor that encourages a company to pursue PRTs. Jacob Goldberg, Investment Director, Pension Practice, and Serge Agres, Managing Director, Pension Practice at Cambridge Associates in “Pension Risk Transfers Have Several Downside Risks for US Plan Sponsors” observe that premiums have risen nearly 200% in the last 10 years. They suggest the funding relief that came with the Moving Ahead for Progress in the 21st Century Act (MAP-21) is a cause of the hikes; October Three observes that premiums’ size depends on the number of participants in a plan—the more participants, the higher the premiums.
Kleinstuber remarked that plan sponsors are not perceiving that the value they receive for paying the premiums is worth the cost.
Guidance
Jones cited Department of Labor Interpretive Bulletin (IB) 95-1 as a prime example of guidance that concerns fiduciary standards applicable when selecting an annuity provider for a pension plan.
Jones noted that IB 95-1 provides guidance on:
- lines of business;
- size of the balance sheet vs. liabilities;
- quality and diversity of investment portfolios;
- capital holdings; and
- participant protections.
Important Considerations
There are additional considerations beyond IB 95-1, Jones said, such as understanding the organization of the structure, the length of time in the market, and mechanisms and services that help ensure a smooth transition when a PRT is undertaken.
Panelists stressed that data is a critical factor when a PRT is under consideration. Jones said that insurance companies and plan sponsors need to provide information on coverage, payments, benefits, names, Social Security numbers, payment amounts, and addresses. There is a special need, he said, for data that helps get good pricing, such as the partial lump sum window history, hourly pay vs. salary, and job descriptions.
Schau struck a similar tone, arguing that there is a need for “clean, stable data.” She said that additional necessary information concerns whether there are medical payments going out and cell phone numbers, which she said are especially helpful in finding missing participants.
There are additional factors one should consider regarding PRTs, suggest Goldberg and Agres. They caution that while PRTs may be cost-effective way to reduce liability for an overfunded plan, they also could result in funded status dropping, especially for underfunded plans. Further, they contend that longer-term higher fees and premiums could be the price of the short-term reduction in costs that can be realized through PRTs.
Action Steps
Panelists had a wide range of suggestions regarding steps that should be taken when a company is considering a PRT.
Assets. Look at where the assets are invested, suggested Kleinstuber. “Know where they are going,” she said.
Partial or full? Kleinstuber said it is important to consider whether it is a full or a partial plan termination? And whether there will be a buyout of some part of the plan.
Mechanics. Milliman in its May 2024 Pension Buyout Index suggested that plan sponsors keep in mind that factors such as plan design and the characteristics of the participants could affect the cost of settling pension obligations with the insurer.
Jones suggested considering factors about the deal itself, such as who will be running it and who will choose the insurer. He added that one should be sure they are working with an experienced partner that understands the mechanics of the market.
Uncashed checks. Kleinstuber said that it is good to know about uncashed checks. And, she said, one should remember that “Just because a check is sent doesn't necessarily mean that it has been cashed.”
Remember participants. Participants don’t like change, observed Kleinstuber. There is a lot of uncertainty for participants, she said; further, it raises suspicions and may raise concerns about the stability of the employer. She suggested holding meetings with active employees and helping employees understand what’s happening. “We want participants to have a good experience,” agreed Schau, telling attendees that her firm works closely with plan sponsors and participants.
The path and the end goal. Schau stressed the need for early planning. “Planning is everything,” agreed Kleinstuber, who also argued that it is important to proactively head off problems. Also, consider what the path to the PRT looks like, said Schau, and what the plan will look like. “What is the end goal?” she asked.
