Aligning Stakeholder Interests in Pension Buyouts

A lot of parties are involved in even a modestly sized pension risk transfer deal; aligning their interests, timelines and incentives for success is no small task.

By John Manganaro | October 12, 2016
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A new issue brief from the Pension Committee of the American Academy of Actuaries explores the perspectives of different stakeholders involved in pension risk transfer (PRT) transactions, suggesting careful consideration of differing viewpoints along the way can dramatically improve the PRT experience.

“Pension risk transfers can have significant implications for the financial security and responsibilities of different plan stakeholders,” notes Ellen Kleinstuber, chairperson of the Pension Committee. For example, employers generally come into the process with two fundamental motivations: They want to address longevity and investment risk, and they want to act before increasing Pension Benefit Guaranty Corporation (PBGC) premiums adds even more to the cost of running a pension plan.

Employees, on the other hand, generally want PBGC coverage for their pension plan assets, and the resulting loss of PBGC insurance coverage following a PRT buyout can be concerning—especially if the plan sponsor and providers fail to effectively communicate the need for change and exactly how and why the PRT process will unfold. Furthermore, during partial buyouts, changes in plan funding levels following a risk transfer transaction can negatively affect the benefit security of participants remaining in the plan post-transaction.

These two parties in semi-conflict will then inevitably interact with at least a small handful of service providers who will help get the transfer deal in place—likely to include advisers, legal resources and sales/service professionals from the insurer offering a bid for the PRT business. According to the Pension Committee, it is important for plan sponsors to remember that service providers are looking to make as profitable a deal as possible in all this, so they should be ready to do some tough negotiating on terms.

With such challenges in mind, the issue brief “does not offer a judgment about whether PRT transactions, on balance, enhance or detract from a retirement system. It instead seeks to provide a factual basis upon which such determinations may reasonably be made.”

NEXT: Factors considered in PRT transactions