Mercer Sees Pensions Handing Off Risk in Growing Numbers

A global trend of transfers in pension risk have accelerated as plan sponsors offload risk to third parties, says Mercer, which is positioning itself to profit from the demand.

(June 20, 2012) — Mercer has expanded its capacity to handle pension risk transfer assignments as defined benefit plan sponsors are increasingly transferring their risk to third parties.

In response to the perceived increase in pension risk transfer deals, Bernie Hughes, CFA, has joined Mercer Investments as a senior consultant in the Annuity Settlement Group — a hiring motivated as countries around the world have battled growing pension obligations amid low interest rates, volatile equity markets, and rising life expectancies. As a result, pension deficits have continued to grow, presenting plan sponsors with “increasingly unwelcome pensions distractions,” according to Mercer.

“We have seen Prudential announce a longevity reinsurance deal with a UK insurer and we know that other US insurers are also interested in UK business,” stated Gordon Fletcher, one of Mercer’s US-based specialists in pension longevity risk. “This is significant since it shows that at least some US insurers have such a strong appetite for pension risk that they are willing to travel over 3,000 miles to get it. Across the globe, we are seeing developments, with AEGON in the Netherlands transacting a longevity swap and the announcement that a Canadian insurer is now open for longevity business.”

The observation by Fletcher also follows news earlier this month of General Motors Co’s intended discharge of around $26 billion of defined benefit pension liabilities to individual plan members.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

Mercer’s Global Head of DB Risk and Senior Partner, Frank Oldham added: “The market for transferring pension risk away from plan sponsors has developed significantly in the UK in recent years with the number, size and sophistication of these deals all moving on in leaps and bounds. Other European countries, particularly the Netherlands and Ireland, are also starting to see more activity and interest in this area and so it was therefore just a matter of time before these developments transferred to a latent US market.”

Illinois Pensions Add Actuary to Boost Transparency, Public Image

Illinois Governor Pat Quinn has signed a law to increase the transparency of the state's pension systems.

(June 20, 2012) — Illinois Governor Pat Quinn has signed a new law that will add an actuary post to oversee the state’s pension systems in determining future contributions for additional transparency.

“We welcome the introduction of the state actuary having another set of eyes,” Dave Urbanek, spokesman for the Teachers’ Retirement System for the State of Illinois told aiCIO. Yet, according to Urbanek, Illinois’ pension systems have always followed state law when determining future contributions. “Nevertheless, we will work with the illinois auditor general and state actuary,” he said, noting that the introduction of the law may be an effort to restore public image.

Senate Bill 179 creates the position of a state actuary to oversee the five state-funded pension systems, which have a combined unfunded liability of $83 billion. “We must restore integrity and accountability to the state’s pension systems and we are headed in the right direction with this new law,” Governor Quinn said. “Now is the time to roll our sleeves up and continue to work together to fundamentally reform our pension system and rescue it from drowning in an ocean of unfunded liability.”

The law, which takes effect immediately, is designed to ensure that the state’s pension systems follow Illinois law when determining future contributions.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

Currently, each pension system submits a certification plan to the governor and the General Assembly. Under the new law, the systems will submit their proposals to the governor, the General Assembly and the new state actuary who will review the plans. The actuary will then issue a report containing recommended changes to the actuarial assumptions. Final certifications will be submitted on January 15. The actuary will also be responsible for conducting reviews of the actuarial practices of the systems.

The Illinois actuary will review assumptions, valuations and actuarial practices for each of the state’s five systems: the $37 billion Illinois Teachers’ Retirement System, Springfield; the $14 billion Illinois State Universities Retirement System, Champaign; along with the three systems whose combined $11.9 billion in assets are overseen by the Illinois State Board of Investment — Illinois State Employees’ Retirement System, Illinois Judges’ Retirement System and Illinois General Assembly Retirement System.

«