The Ins and Outs of Pension Risk Transfers

Following the $1.3 billion group annuity purchase of 45,000 International Paper pensions, Prudential’s senior vice president and actuary shows CIO how it’s done.

Prudential Insurance Company of America will cover the retiree benefits of 45,000 International Paper workers, following a $1.3 billion group annuity purchase last week.

The Prudential agreement will cover retirees with benefits under $450 per month.

According to slides obtained by CIO from International Paper, the company began its de-risking plan in 2004, when it closed its defined benefit pension plan to new entrants. In 2014, IP announced the plan would be frozen for active salary participants effective December 31, 2018. In 2016, a voluntary team-vested buyout program reduced the plan size by 10%, and introduced a new LDI policy. In addition, more than $3 billion in contributions have been made to the pension plan since 2014. Although it provided the slides, International Paper declined comment for this article.

The July 31, 2017, documents show that to reduce risk in the pension plan for 2H 2017, International Paper was willing to take additional measures that included reallocating current fixed income investments to longer duration maturities, expanding “certain hedging strategies,” and exploring “other risk mitigation options,” eventually leading to the group annuity purchase.

The option to transfer a chunk of pension obligations is a recurring trend that continues to grow and is more common in larger plans.

Peggy McDonald, senior vice president and actuary for Prudential Financial, noted these transactions occur, in part, due to  increases in per-person Pension Benefit Guarantee Corporation (PBGC) premiums.

The PBGC raised its per-person annual premium rates earlier this year from $64 to $69 for single-employers under the Bipartisan Budget Act of 2015. The law enacted by President Obama will see the PBGC raise its premiums each year until 2019, when the flat-rate premium reaches $80 per person. Beginning in 2020, the fixed premium will be re-indexed for inflation.

In addition to the fixed-rate premium, plan sponsors also pay a variable rate premium where the plan sponsor pays a percentage of its unfunded liability. That variable premium rate has also increased significantly, from 0.9% of unfunded liability in 2013 to a scheduled 4.2% in 2019, with a projected cap of $549 per person in 2019.

“The trend that we’ve seen in the last year or so has been for plan sponsors to, when they’re embarking on a pension or risk transfer deal, to consider those with the smallest benefits first. They’re going to start with the retirees, who are the most efficient group to transact, and they’re going to start with those with the smallest benefits,” McDonald said. “Some plan sponsors are paying—or by 2019 will be paying—over $600 a person in PBGC premiums, so when you think about paying $600 a year for someone who’s benefit is maybe $50 a month, you can see why a plan sponsor would start with the small benefit group.”

Once the plan sponsor is interested in doing a pension risk transfer, an advisor is hired and helps the plan sponsor structure the deal and assesses the interest of insurers in said transaction. For a deal the size of the Prudential/International Paper’s, McDonald says at least five or six insurers are usually researched and one is chosen.

“Once the interest is assessed, they send [to each of us] an RFP (Request for Proposal) that  RFP asks for a price estimate. Along with the RFP, the advisors send the census data of the plan participant group they are considering for the transaction,” she said. “They also request some specific terms and commitments to service delivery dates to make sure that they know exactly what insurers are capable [of] and willing to do for the transaction.”

Following that round, there is a final pricing round, usually about a month later, which leads to the insurer selection. Once the insurer is selected, the transfer of benefit payment information plays out over a three-to-four-month period before the insurer takes over payment of individual pension benefits. 

In the case of International Paper, after the information transfer process is completed, retirees will start receiving checks and direct deposits from Prudential once their benefits are taken over by the AA-rated insurance company. Prudential will officially begin making benefit payments to retirees that were part of the transaction on January 1, 2018.

“We have been over the last 10 years building up our capabilities—our service delivery capabilities, our transaction capabilities, our actuarial capabilities, and our investment capabilities to be ready for this business,” McDonald said. “We are 100% ready to take on these liabilities and to provide a flawless service delivery to the retirees from International Paper who will be coming over to Prudential.”


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