Pension Risk Transfers Spiked in 2022 due to Higher Interest Rates, Report Shows

Rising interest rates drove increased pension risk transfer activity in 2022, as these transactions totaled $52 billion in premiums last year—the highest total in the decade Aon has been tracking the information, according to a recent report. 

A total of 568 pension risk transfer transactions were made last year, with IBM headlining this activity by completing a $16 billion retiree lift-out in September  2022. This was the second-largest PRT transaction in U.S. history, Aon’s U.S. Risk Transfer report for March 2023 stated. 

Notably, Lockheed Martin made a $4.3 billion PRT transaction in June 2022.  

The pension risk transfer market increased by 28% in 2022, according to Aon. In comparison, the total premium in 2021 was $38 billion, with 444 transactions.  

Even though rising interest rates reduced the size of plan liabilities, making the premiums for individual PRT deals smaller, a large volume of lift-outs and partial buyouts contributed to the increased total premium.  

Aon stated that annuity purchases at the end of small plan terminations typically lead the way in most years, but there has been an uptick in terminations of larger plans recently.  

Buy-ins remain a niche solution, with only a few executed in the U.S., but Aon reported that total premiums of $3.6 billion for buy-in contracts in 2022 were noteworthy. In 2021, buy-ins totaled to $3.9 billion in premiums. 

In addition, Aon found that lift-outs most commonly occurred at the end of the calendar year, when there is more incentive for plan sponsors to act to avoid paying Pension Benefit Guaranty Corp. premiums the following year for the participants being annuitized.  

Under a lift-out, only a portion of the pension plan’s participants get transferred to an insurance company. Typically, the portion of retirees receiving the smallest pension payments are the ones transferred to an insurer.  

Aon’s data showed that 66% of lift-out transactions occurred in the second half of 2022. 

Plan sponsors typically aim to lift out retiree liability close to or below the plan’s projected benefit obligation. Aon found that 64% of retiree lift-outs received final pricing below PBO in 2022, and 78% of the time, the lowest bidder was selected. 

By the end of 2022, Aon found that 10 insurers received more than $1 billion in premiums, with seven of those 10 closing fewer than 15 deals. In addition, three of the 10 insurers received more than $10 billion of premium each, and 68% of the total PRT was made with the same three insurers.  

New insurers Global Atlantic, RGA and American National entered the U.S. PRT market last year, bringing the total number of insurers to 21. Because not all insurers participate in all PRT transactions, Aon said the addition of these insurers will provide more services to different PRT solutions. 

Looking ahead to 2023, Aon predicts that the U.S. PRT market will fall into the $30 billion to $40 billion range.  

“From a transaction count perspective, we expect the number to remain elevated as market conditions – higher funded status and interest rates – bode well for plan sponsors looking to transact,” the report stated.  

With the passage of the SECURE 2.0 Act of 2022, Aon predicts changes to the guidance for fiduciaries on PRT transactions will occur in 2023.  

Similar to the way IBM enacted a split insurer transaction, by purchasing annuity contracts from both Prudential and MetLife for its 100,000 participants, Aon expects that more innovative PRT transactions will occur in 2023.  

In a split transaction, two insurers are each responsible for 50% of participant benefits. Aon’s report said this type of transaction tends to arise on jumbo deals, and large plan sponsors should be aware of this concept, as new entrants and traditional players are increasingly expressing interest in split transactions.  

Additionally, while there was a decrease in lump sum windows in 2022 due to the rising interest rate environment, Aon analysts believe these transactions will become more popular if interest rates level out or drop this year.  

Aon advised plan sponsors to plan accordingly if looking to complete a lump sum window and annuity purchase in the same year.  

On a global scale, Aon sees growth in the Canadian and European pension risk transfer markets. Solutions vary from country to country, but many multinational corporations with pension plans are looking at ways to de-risk globally, Aon said.