Rising PBGC Premiums Drive Increase in PRT Activity

Mercer attributes the rise in pension risk transfer activity to PBGC premium increases.

Major pension risk transfer (PRT) deals announced by Bristol-Meyers Squibb and Motorola in 2014 and Kimberly-Clark in February 2015 in addition to more than 300 non-jumbo deals total approximately $9 billion to $10 billion since 2011, according to the Mercer Global Pension Buyout Index.

Mercer notes that historically, most bulk buyouts were for full plan terminations but, recently, there has been a significant increase in the proportion of sponsors buying out retirees only.

The consultant attributes this increase in activity to rising Pension Benefit Guaranty Corporation (PBGC) premiums and more attractive annuity pricing compared to balance sheet liabilities.

According to the index, during 2014, annuity pricing relative to balance sheet liabilities was relatively stable at roughly 109%. However, as plan sponsors adopted new mortality assumptions for year-end financial reporting, the average premium declined to around 105%. This assumption update was in response to new mortality tables released by the Society of Actuaries in October 2014.

Mercer explains that these new higher longevity expectations were likely previously recognized by insurers, so the annuity purchase price has not changed, but pension plan liabilities account for a greater share of the price. Consequently pension buyouts are now more attractive relative to the balance sheet liability in the U.S. Mercer expects this to drive increased buyout activity in 2015.

Defined benefit plan sponsors must now report certain PRT activities to the PBGC.