DBSummit07: Pension Liabilities: Risk Management to Risk Transfer

One of the more intriguing panels at PLANSPONSOR's 2007 DBSummit dealt with practical solutions for managing pension plan risk.

align=”center”> Audio Recordings of the 2007 DB Summit Are Available Here 


One solution that has emerged in recent months is that of transferring risk by transferring plan sponsorship. Tony Osborn-Barker, Global Head of Pensions at BNP Paribas Securities Corp., said 20 new insurance companies popped up in the U.K. over the last couple of years specifically to take pensions. However, the outcome has not been what was expected, Osborn-Barker pointed out.

The ability for the new sponsors to de-risk pension plans in the U.K. under the scrutiny of the current regulatory environment is almost impossible, Osborn-Barker contended. Additionally, the business is not tenable without a significant number of plans being acquired, he explained, and the number has not been as expected (see  Rush to Offload DB Plans Hasn’t Happened ) – despite a compelling business argument for shedding responsibilities that aren’t “core competencies.”  

Pension Benefit Guaranty Corporation (PBGC) Interim Director Charles E. F. Millard (confirmed by the Senate as Director a week after the conference – see  Millard Confirmed as PBGC Director ) told audience members that a full plan transfer could be a good idea if it provides enhanced security for employees and the PBGC. It is probably a better idea for C- or B-rated companies that are more likely to default on their pensions, he noted.

Plan sponsors are asking if U.S. regulators would consider the transfer as being for the exclusive benefit of participants, but there has been no administration position on the issue, Millard pointed out.   Speaking hypothetically, and from his personal perspective rather than expressing an official position, Millard said that, to gain approval, a sponsorship transfer would likely need to negotiate:

  • The new sponsor’s commitment to complete controlled group liability,
  • The transaction being recorded on the balance sheets of both firms,
  • The new sponsor being of good size and having a good credit rating,
  • The new sponsor’s commitment on investment risk,
  • A limit on the number of plans assumed by the new sponsor.

Warren Machol, of WLM Associates, sees full risk transfer of a plan as the final solution on the continuum of DB risk management, and offered other steps sponsors can take to reduce risk. Machol suggested adjusting the plan’s asset allocation and looking into innovative portfolio strategies, separating the plan between actives and retirees and only transferring the retiree portion, and purchasing a structured note to remove the risk for some period of time.

Panel member Phil Waldeck, Senior Vice President, DB Risk Transfer Solutions, Prudential Financial, added that the traditional solutions for managing risk – closing or freezing the plan, changing the funding policy, plan annuitization, and outsourcing administration – are still practical options.  

He added that we should also expect that plan sponsors will increasingly adopt liability driven investment strategies to de-risk their plans and that partial and full pension risk transfers will soon emerge as well.   The key for partial and full risk transfers will be thoughtfully addressing the important benefit security issues with regulators.