Thought Leadership

Protecting Participant Benefits

Published In November 2016 | Sponsored by MetLife

PS1116-TL-MetLife_ImageWayne Daniel, SVP & Head of U.S. Pensions, MetLifeAs the pension risk transfer (PRT) market booms, ensuring that defined benefit (DB) pension plan participants’ benefits are protected is paramount. Therefore, educating participants about how their benefits will be protected becomes a vital part of a successful transaction. Plan sponsors need support and assistance from the insurer who will be assuming their plan’s risks, which includes customer service and participant communication. Enter MetLife, a leading insurance and employee benefit provider that has been in the pension business for more than 90 years. The company’s Retirement & Income Solutions Customer Solutions Center, which includes the U.S. Pensions business, was recently recognized by J.D. Power for providing “An Outstanding Customer Service Experience” in its live phone channel. With its focus on customer centricity, MetLife has dedicated significant resources to make it easy for annuity customers to do business with the company. Wayne Daniel, Senior Vice President and Head of U.S. Pensions at MetLife, spoke with PLANSPONSOR about pension risk transfer, including the importance of participant protections and the customer experience.

PS: Today, as companies contemplate whether or not to transfer the risk of paying DB pension benefits to either the individual, by offering lump sums, and/or to the insurer, who becomes responsible for paying benefits in the form of a guaranteed annuity, how can these decisions impact their participants? What information do participants need to make informed decisions?

Daniel: For a plan sponsor contemplating a de-risking from their pension plan, there really are two main pension risk transfer options. First, for terminated vested participants, the plan sponsor may consider offering a lump sum option. This requires individual participants to make a decision. The participant needs to choose whether to accept the lump sum in lieu of the benefits they were due under the pension plan, which is typically an annuity at a later age, or decide to decline the lump sum and stay a term vested participant until they reach their retirement age.  So, how do they make this decision?

One piece of information they will need to make this decision is how the lump sum amount compares to the annuity benefit. The participant also needs to understand that with a lump sum, they are assuming all of the investment, mortality, and longevity risk, and these are risks that would otherwise either be held by the plan or transferred to the insurer. There are some dangers of the lump sum being depleted while they still have a need for income during their retirement years.

The other form of pension risk transfer is when the insurer assumes responsibility for paying the benefit that was due to the participant under the plan until the last retiree and their beneficiaries die. This form of risk transfer, known as an annuity buyout, doesn’t change anything from the participant perspective. They will continue to receive the benefit they were always entitled to under the plan. The rules governing the selection of the insurer for a risk transfer are very comprehensive and recognize the paramount importance of benefit security for participants, requiring that the safest available annuity is selected.

Also, insurance companies are required to be fully funded at all times. Not only for pension liabilities, but across their entire book of liabilities, whereas the average pension plan in the US is not fully funded.

PS: When risk is transferred to an insurance company, does it represent a risk transfer to the participant in any way? What do participants need to understand about this type of transaction? What can plan sponsors do to help?

Daniel: A risk transfer to an insurance company, where the same benefits earned are preserved in exactly the same form, does not represent a risk transfer to the participant in any way. Emphasizing, through education and communication, that nothing is changing in terms of the benefits for the participant, I think that’s key. We found in our most recent Pension Risk Transfer Poll of DB plan sponsors that communication was the most important factor in ensuring success of a pension risk transfer.

By communicating to plan participants about the pension risk transfer, plan sponsors can help participants feel confident that their benefit will be there when they need it. Some plan sponsors will communicate with plan participants about how their benefits will be paid once they make the decision to transfer the liabilities to an insurer, while others will communicate with plan participants once an annuity buyout has been finalized with a specific insurer.

PS: What role does administration play in a successful PRT transaction?

Daniel: Customer service and the way that the administration is conducted are also critical elements in a successful transaction. At MetLife, we’ve developed a reputation for administering complex plans—sometimes the benefit provisions can be quite complicated, with lots of different sub-groups depending on the duration and time of service and the category of a participant in the plan. We can develop customized solutions that are tailor-made for a specific plan, but more important than that, we focus very closely on what the individual participant experience is and we really look to make that a superior experience.

We’ve got something we’re very proud of, called Annuity Customer Experience [ACE]. It’s a recordkeeping platform designed to manage the lifecycle of an annuity payment, and can be accessed by the individual annuitants through multiple channels. So if an annuitant wants to call, they can call. If they want to email, they can email. It really does facilitate ease of administration for the individual whenever they have any queries or they have any changes to process.

PS: What should plan sponsors be looking for when choosing to transfer risk? What do you think are the top items that they need to be considering?

Daniel: In terms of the plan sponsor decision, we’re talking about the fiduciary decision. There’s a settlor responsibility that plan sponsors have in terms of setting up the plan and funding the plan. There’s a fiduciary responsibility when they’re considering a de-risking. Those are framed by the Employee Retirement Income Security Act of 1974 [ERISA] and other regulations. As a result, plan sponsors and their fiduciaries, as I noted earlier, need to make sure that the insurer they select is one that can provide the safest available annuity, and there are a number of criteria that need to be considered in making that decision in terms of the size, scale, expertise, risk management, and the financial stability of the insurer.

Once you’ve passed that, it’s then about how confident the plan sponsor is that the insurer will be able to deliver the service that the participants and their beneficiaries have come to expect. Many plan sponsors feel a lot of responsibility for their participants’ security and the benefits paid out by the plan. We tend to find that, in our face-to-face meetings with the plan sponsors and with their advisers, they will focus on our call center and inquire about the different metrics around our service. How quickly are calls answered? How quickly are queries resolved? How quickly do we respond and get back to participants? Plan sponsors also look at participant communications—what do these communications look and feel like? How do we sound when someone calls in? What does the letter look like? To that aspect, there’s lots of activity that we do on a continuous improvement spectrum that you almost don’t notice day-to-day. We have projects that review our forms and say, ‘Do we need to ask for all of those items of information? How can we make the form clearer for the participant to understand? How can we ensure that it’s the simplest possible process to make a particular change or get a query satisfied?’ It’s really that continuous improvement where MetLife seeks to differentiate itself in the market in terms of its reputation.

PS: What do you say to a plan sponsor who is considering this but thinks they should wait a little bit longer? Why is now the time to consider this?

Daniel: The broad thrust of our message to the market and to plan sponsors is that the cost of holding an ERISA denominated risk is quite volatile. It’s expensive compared with the cost of holding say a fixed principal corporate debt on your balance sheet. It’s an expensive liability to hold.

It’s a complex one to administer and manage and we have considerable decades of expertise in managing this risk. Once the plan has already embarked on a journey to start to de-risk in terms of liability-driven investing, getting the assets and the liabilities to move in sync with changes in markets, then you eventually get to a point where the level of interest rates actually doesn’t matter. That’s because even if interest rates go up or if they go further down, if your assets and liabilities are moving in sync it really doesn’t change the position. Then it becomes more tactical with communication within the plan sponsor and all of the stakeholders involved, in terms of when to do the transaction, and it doesn’t really require waiting for market conditions.

It’s an education process among the plan sponsors. The advisers play a critical role here and I know a number of the advisers have models whereby you plug in the assets and liabilities of the plan, you project various scenarios—e.g., interest rates level, interest rates up, interest rates down and then they track out five years and they work with the plan sponsor to compare the scenarios with where they are today. Running those different scenarios allows the plan sponsor to feel comfortable that if everything is aligned in terms of their assets and liabilities and their decision-making process, there’s no need to wait; they can choose to transact today.

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