Nearly half of large defined benefit (DB) plan sponsors (45%) have taken proactive steps to prepare for an eventual pension risk transfer, according to MetLife’s 2015 Pension Risk Transfer Poll.
Among those plan sponsors who are very or somewhat likely to engage in pension risk transfer, the percentage who have taken preparatory steps rises to 72%. Wayne Daniel, senior vice president and head of U.S. Pensions at MetLife, tells PLANSPONSOR the total accumulated value of DB plans in the U.S. is more than $3 trillion and only a small portion of that has been de-risked. “We certainly expect [risk transfer] to be a growing and continuing trend. We see interest in derisking across DB plans of all sizes,” he says.
When asked what type of de-risking activity they would consider, nearly half of DB plan sponsors (46%) would most likely transfer risk with an annuity buyout, including 37% who would consider a buyout in combination with a lump sum offer. Of those planning to use a pension buyout, more than half (57%) are considering a pension risk transfer option to an insurance company for their DB plan in the next two years. This percentage increases to 63% for plans with DB plan assets of $250 million to $499 million and 77% for plans with DB assets of $500 million to $1 billion.
The top catalysts for a pension risk transfer to an insurance company are additional Pension Benefit Guaranty Corporation (PBGC) premium increases (51%), the impact of the new mortality tables issued by the Society of Actuaries in 2014 (45%) and the funded status of their plans reaching a predetermined level (34%).NEXT: Preparing for pension risk transfer
A critical step in preparing for a pension risk transfer transaction is obtaining agreement among decision-makers about how to approach derisking. According to the survey, plan sponsors identify key stakeholders as members of their company's C-suite, including the CEO, CFO, among others (87%), plan actuaries (72%), attorneys/legal counsel (68%), ERISA/plan governance committee members (62%), and outside consultants/advisers (45%).
When it comes to executing a successful pension risk transfer transaction, plan sponsors are focused on communication. Thirty-one percent of plan sponsors indicated that communication is the most important factor for ensuring success, followed by the price/cost of the transaction (26%), among other factors.
“Successful communication includes communicating with both plan participants and the insurance company to which liabilities are being transferred,” says Daniel. “Communications play an important role in helping participants feel confident that their benefit will be there when they need it. The poll found nearly half of plan sponsors (49%) plan to communicate with plan participants about how their benefits will be paid once a buyout has been finalized with a specific insurer, while 36% will communicate with plan participants once they make the decision to transfer the liabilities to an insurer.”
According to Daniel, once a DB plan approaches the insurance market, a transaction can usually be done in three to six months, assuming the plan is well prepared, and has good participant data. “Often where we see delays occurring, these delays can be attributed to incomplete or inaccurate data,” he says.
Taking steps such as evaluating costs and benefits, identifying an acceptable cost level, securing the necessary agreements and monitoring the environment and funded status will put the plan sponsor in the best position to act when they believe the time is right for their company and their plan, Daniel says. “We believe that these steps are necessary so that the plan sponsor can react and execute promptly when the opportunity arises.”
The MetLife 2015 Pension Risk Transfer Poll was fielded between August 24 and September 8 among 229 defined benefit (DB) plan sponsors from Fortune 1000 companies, as well as the next largest 2,000 companies by DB plan asset size. Three in four respondents (72%) reported DB plan assets of $250 million or more, with 35% having assets greater than $1 billion.
« TDFs Can Be the Vehicle for Alternatives in DC Plans