US single premium pension buyout product sales fell to $1.38 billion in the first quarter of 2018, down sharply from the $11.1 billion recorded during the previous quarter, and just below the $1.42 billion reported during the first quarter of last year, according to LIMRA Secure Retirement Institute.
“For the third year in a row, first quarter sales exceeded $1 billion,” Eugene Noble, a research analyst at LIMRA Secure Retirement Institute, said in a release. “There have been some major PRT [pension risk transfer] deals announced recently that were not reflected in first quarter results. We expect to see these sales reported in the coming months.”
It is also the 12th straight quarter of sales exceeding $1 billion. In a group annuity risk transfer product, such as a pension buyout product, an employer can transfer all or part of its pension liability to an insurance company. This allows an employer to remove the liability from its balance sheet, and reduce the volatility of the funded status.
According to LIMRA’s quarterly US Group Annuity Risk Transfer Survey, which covers 15 companies that represent 100% of the US market, total assets of buyout products were more than $114.7 billion in the first quarter. This is nearly 16% higher than the previous year, as survey participants reported 125 new contracts in Q1 2018.
“For the past 20 years, the number of US employers sponsoring defined benefit plans has declined,” said Noble. “Low interest rates, stock market volatility, increased longevity, and rising Pension Benefit Guaranty Corporation premiums contribute to the growing plan sponsor interest in pension risk transfer.”
LIMRA said the Tax Cuts and Jobs Act of 2017 could encourage more plan sponsors to purchase group annuity contracts. The tax reform reduces the corporate tax rate to 21% from 35%, effective in tax year 2018. LIMRA said the new law could provide an incentive for some corporations to make tax-deductible contributions as late as mid-October into their defined contribution plans for the 2017 tax year while the 35%tax rate is still in effect. Also, the tax law enables multinational companies to repatriate profits that have not been taxed in the US from 1987 to the present from overseas subsidiaries at a one-time tax rate of 15.5%.
“We expect some companies will take advantage of these measures to improve the funding status of their DB plans,” said Noble, “putting them into contention for PRT activity.”
LIMRA SRI projects the pension risk market will surpass $23 billion in 2018.