A growing number of DB plan sponsors are considering pension risk transfer (PRT) products at a time when Pension Benefit Guaranty Corporation (PBGC) premiums have increased by more than 300%, a new study finds.
Eight out of 10 employers are interested in PRT, and defined benefit (DB) plan sponsors have become increasingly interested in these products since 2014, according to a new study by the LIMRA Secure Retirement Institute. The same report found that four in 10 DB plan sponsors reported being “very interested” in PRT products, representing a 10% spike in interest compared to data gathered from an Institute study in 2014.
A pension risk transfer allows an employer to transfer all or a portion of its pension liability to an insurer. The move could remove the liability from an employer’s balance sheet and reduce the volatility of the plan’s funded status. Institute research shows PRT buy-out sales totaled $13.7 billion in 2016 — the second highest annual total recorded.
Overall, 81% of employers reported feeling very interested or somewhat interested in PRT vehicles. Out of all those who reported not being interested in these products, the top driver of that decision was lack of knowledge (40%). Other employers cited alternative means to address their pension risk including liability-driven investing, which aims to reduce the risk associated with market volatility by precisely matching assets to liabilities.
LIMRA notes that while this strategy can lower investment risk, plan sponsors would still have to address other obstacles such as mortality and fiduciary risks, while also paying for Pension Benefit Guarantee Corporation (PBGC) premiums. For every unfunded dollar in a DB plan, the employer is required to pay a premium to the PBGC. Throughout the last four years, the variable PBGC premium has increased by more than 300%, from 0.9% of unfunded liability in 2013, to 3.4% in 2017. It is projected to rise to 4.1% in 2019. According to the study, 8 in 10 employers with a DB plan are less than 90% funded.
Meanwhile, more than a quarter of employers with DB plans say low interest rates dissuade them from considering PRT. To address these issues, plan sponsors have taken several steps. One method, which LIMRA finds is growing in popularity, is the borrow-to-fund method, in which an employer borrows the money to fund its DB plan. In today’s low-interest environment, it could be possible for a company to obtain a loan for less than the current PBGC rate.
Institute research shows that the proportion of employers with frozen DB plans has increased seven percentage points from 2014 to 57% in 2016. LIMRA notes this is a positive trend for the PRT market because freezing a plan is one of the first actions a plan sponsor must take on the path to a buy-out. The Institute finds that employers with frozen DB plans are more interested in PRT products (84%), compared with those who haven’t frozen their plans (69%).
Study results are from a survey of 258 employers that sponsor a traditional DB plan, conducted in October 2016. LIMRA members can access the full report by visiting: Heating Up Plan Sponsor Interest in Pension Risk Transfer (2017).