As the amount of annual risk transfers continues to increase, a large number of corporate pension plans are looking to fully divest their defined benefit liabilities within five years.
The methods of choice for these companies are group annuity contracts and structured buyouts, or lump-sum payouts, both of which help prop up their funded statuses, according to MetLife’s 2019 Pension Risk Transfer Poll. The deals allow the businesses to pass off their retirement assets to an insurance company.
Out of 102 defined benefit pension plan sponsors surveyed, more than one-third want to fully divest their liabilities within five years (10% within two, 24% in two to five). In the latter bracket, 17% have more than $1 billion in assets.
Wayne Daniel, MetLife’s senior vice president and head of US pensions, told CIO that “recent economic and regulatory changes” are causing more companies to take “concrete steps” to de-risk their pension plans.
He points to higher fees that the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures private sector pension benefits, charges DB sponsors. These are the “primary catalyst for plan sponsors to initiate a pension risk transfer to an insurance company (55%).” The PBGC’s motivators include premium increases (52%) and a change in the premium methodology, which now adheres to a risk-based formula (18%).
Other risk transfer drivers are interest rate changes (42%) and funded status reaching a predetermined level (29%).
Almost half of the corporate DB plan sponsors, however, want to take their time with total liability divestment and wait more than five years. Additionally, roughly one-quarter of these plans don’t want to eliminate their liabilities at all.
“De-risking can and should be viewed as a spectrum of choices—rather than a “once and done” transaction—with a basic non-guaranteed liability driven investing (LDI) (or asset liability management) strategy at one end of the spectrum to a full pension buy-out at the other end,” Daniel said.
He added that when thinking about a potential de-risking strategy, plan sponsors and CIOs should “determine what they are trying to accomplish with their plan, where the plan fits in with other qualified plans they offer, and how they can achieve the firm’s business and talent retention goals, in light of the macroeconomic environment, in a way that addresses the organization’s strategic focus and meets the needs of the plan participants.”