More Conversation Needed on Pension Risk Transfer Solutions

Dietrich & Associates new white paper, Pension Risk Transfer Solutions: Adding Guarantees to the Defined Benefit Fixed Income Conversation, says while the benefits of PRT solutions are clear to professionals who have experience working with these institutional insurance products, the fact is these products are not part of the broader pension investment conversation which relies on more traditional market valued (non‐guaranteed) investment products. PRT solutions come in many different shapes and sizes, but all employ powerful financial guarantees backed by some of the largest, most well-capitalized life insurance companies.   

The ability to customize the PRT structure to employ an optimal mix of covered guaranteed cash flows (based upon investment and funding objectives) provides pension sponsors with a compelling alternative to traditional fixed income mutual or collective funds, the paper contends.  

According to Jay Dinunzio, senior consultant at Dietrich & Associates and the author of the new paper, “Pension cost and volatility issues have led to the “freezing” of benefits in almost half of corporate defined benefit pension plans. For this growing group of organizations, plan termination (and the associated required annuitization) is a clear objective that is challenged by recent low interest rates and unfunded liabilities. For many sponsors the next few years will be focused on de-risking their pension program in order to predictably fund the plan over a series of years. Inevitably, this shift will lead sponsors to shorten investment horizons and associated asset return targets, which may result in higher costs as a required trade-off to arrive at more certain outcomes. This paradigm shift towards liability driven investing in defined benefit plans is creating a compelling opportunity for insured pension risk transfer solutions to add significant value to the conversations that pension committees and consultants are having regarding fixed income investments.”  

The paper discusses various PRT solutions and provides an introduction to a new “guaranteed” asset class. It encourages pension plan sponsors, investment consultants, actuaries, investment managers and other pension service providers to enter the rapidly evolving conversation surrounding pension risk and liability driven investing.