DB Plan Sponsors Preparing for PRTs

The most common preparatory steps taken include an evaluation of the financial impact of a pension risk transfer; discussions with stakeholders; data review/cleanup; and, exploration of the PRT solutions.

Nearly nine in ten defined benefit (DB) plan sponsors (87%) believe the level of 2017 pension risk transfer (PRT) activity will be at least as, or even more, robust than in 2016, according to MetLife’s 2017 Pension Risk Transfer Poll.

Nearly all plan sponsors (92%) are aware that, although the length of time it takes to complete a PRT transaction will vary by plan, the entire process typically takes six to 18 months. To ensure that they are ready to act, more than six in 10 plan sponsors (61%) have taken preparatory steps for an eventual PRT transaction, up from 45% in 2015. The percentage of plan sponsors that have taken preparatory steps rises to 79% among plan sponsors that are likely to engage in PRT to an insurer in the next two years.

The most common preparatory steps taken include an evaluation of the financial impact of a pension risk transfer (71%); discussions with key stakeholders (67%); data review/cleanup (64%); and, exploration of the PRT solutions available in the marketplace (59%). Among those planning for a buyout or buyout in combination with a lump sum, one in five (20%) has already secured an illustrative bid from an insurer. According to MetLife, securing an illustrative bid is a strong indicator of intent to transact in the near future.

The top catalysts driving sponsors to consider transferring pension obligations to an insurer are Pension Benefit Guaranty Corporation (PBGC) actions (64%)—this includes PBGC premium increases (58%) and a change in the PBGC premium methodology to the risk-based formula (29%); interest rates (50%); and, the impact of changes to mortality tables proposed by the U.S. Internal Revenue Service (IRS) in 2016 for use starting in plan years beginning on or after January 1, 2018 (34%). Other notable factors for initiating PRT include the regulatory environment (29%) and funded status reaching a pre-determined level (26%).

Implementing PRT Transactions

When asked about the type of PRT activity plan sponsors will most likely use to achieve their de-risking goals, nearly 57% say they will use an annuity buyout, including 43% who plan to use a combination of a lump sum and annuity buyout. Interest in annuity buyouts rose from 46% in MetLife’s 2015 Pension Risk Transfer Poll, which included 37% who planned to secure a buyout in combination with a lump sum offer.

Nearly half of plan sponsors (47%) say financial strength is the most important consideration when selecting an insurer for an annuity buyout transaction, followed by the cost of the annuity transaction (33%) and recommendations from their consultant or independent fiduciary (15%).

More than two-thirds of plan sponsors (69%) are aware that it is possible to split an annuity buyout transaction among two or more insurers. The highest level of awareness is among sponsors with $1 billion or more in  DB plan assets (75%). While there is a high level of awareness about split deals, only one in five plan sponsors (21%) say that if and when they are ready to complete an annuity buyout, they would be likely to split the transaction among two or more insurers.

Four in 10 plan sponsors (44%) say they would be unlikely to split the transaction, primarily for reasons of perceived complexity, believing it would cause administrative burdens and that it would be easier to manage a single transfer.

The majority of plan sponsors intend to tranche their annuity buyouts by participant population. Retirees are identified as the most common population for which sponsors are considering purchasing annuities (53%), followed by terminated-vested participants (47%). Only one in five (22%) say they would secure a buyout for all participants.

When their company is ready to complete an annuity buyout, more than half of plan sponsors (51%) say they would be more likely to select an insurer that allows the premium for the annuity to be paid with assets-in-kind (AIK)—an emerging trend. MetLife explains that with an AIK transfer, a relatively new approach used in the U.S. since 2012, the premium for the annuity is paid by transferring ownership of some or all of the plan’s eligible assets to the insurance company, as opposed to liquidating plan assets for cash. An AIK transfer is possible when assets held by a DB plan are generally consistent with those the insurer would deem suitable for its portfolio, pursuant to regulatory requirements and internal risk management practices.

The full survey report may be downloaded from here.