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).
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.
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