PRT Still a Useful Tool for Plan Sponsors

The effects of the COVID-19 pandemic slowed pension risk transfer activity earlier in the year, but economic factors for transactions remain favorable and Q4 could be a record quarter.

The pandemic has slowed the pace of annuity sales for pension risk transfers (PRTs) in the U.S. somewhat this year, says George Palms, president of Legal & General Retirement America. “We expect it will be a $25 billion year versus $30 billion last year,” he says. “But, in light of the effects of COVID [on businesses], the effect on pension risk transfers has been minimal.”

Mark Paracer, assistant research director for the LIMRA Secure Retirement Institute (SRI), says the economic problems that have cropped up as a result of the pandemic have had a negative impact on PRT sales in 2020, both in terms of volume and dollars. “Buy-out sales as of June 30 totaled $6.7 billion, down 25% compared to the $8.9 billion recorded in the first half of 2019. The number of contracts sold fell by 23%,” he says.

Palms says his firm has seen a change in types of transactions. “Early in the year, there was a high proportion of plan terminations,” he explains. “Plan sponsors immunized their bond portfolios and are working through the regulatory process of terminating their plans. They don’t want to pause their efforts.”

Now, there are more retiree-only deals, Palms adds. “These are simpler because the amount of money retirees are getting each month is known. There is more uncertainty when transferring pension obligations for employees who haven’t decided yet when to retire and what kind of annuity they will take,” he notes. “These are different components that will impact what benefits employees will get and the price of a pension buy-out transaction.”

There was a slowdown of PRT activity in the second quarter because plan sponsors were trying to raise liquidity to survive the crisis of the pandemic. But, Palms says, the market is now seeing a resurgence.

“The fourth quarter is typically a busy time as plan sponsors look to close out deals by year-end. In four of the past five years, the fourth quarter was the highest quarter for PRT premiums with 42% of the total premium occurring in that quarter,” Paracer says. “The urgency to close deals as of year-end is expected to hold in 2020 as employers look to reduce their PBGC [Pension Benefit Guaranty Corporation] premiums and other costs.”

Palms says one of his coworkers believes Q4 2020 will be “insane” in terms of the number of transactions. “It could be one of strongest fourth quarters on record,” he says.

Asked what effect the low interest rate environment has had on the price of annuity purchases in the U.S. so far this year, Palms says rates went down in March and April but credit spreads went up, so the total rate in terms of how companies price pension liabilities was the same or going down. “Pricing has remained quite attractive based on what I’m hearing from intermediaries,” he says.

He adds that another factor affecting pricing is that the PRT market is still a very healthy, competitive market, with 17 or 18 providers, so plan sponsors can access multiple bidders.

“My advice to a plan sponsor today is that a PRT transaction continues to be a very effective tool to manage risk,” Palms says. “I would recommend working with a knowledgeable intermediary to pick a time other than the fourth quarter when there may be fewer bidders on transactions than in other quarters. In any case, the market conditions remain favorable.”