Prudential says a surge in high-profile pension buyouts may prompt more plan sponsors to consider what a pension risk transfer (PRT) could do for their defined benefit (DB) plans.
The first half of 2015 has already brought billions of dollars in these transactions—concentrated mainly among large and mega plan sponsors—and since 2012 pension risk transfers have totaled $49 billion. Some examples include transactions executed by Motorola, Verizon, Bristol-Myers Squibb and General Motors.
Overall, the economics are still ripe for PRT, presenting an ongoing opportunity for sponsors and advisers to work together to take control of pension risk. In this environment, Prudential has rolled out a white paper dissecting the three basic types of buyout transactions plan sponsors can consider—including a full buy-out, in which the plan is terminated and annuities purchased for all participants; partial buyout, in which annuities are purchased only for specified liabilities, typically current retirees actively drawing benefits; and, finally, a partial buy-out with spin-off and termination, through which the plan is ultimately terminated.
According to Prudential Retirement, the white paper can help plan sponsors identify which path forward may be best—and once the sponsors decide what type of buyout they want to pursue, they can begin the process of transacting, which is outlined in detail through four phases.
“Corporate sponsors are realizing that now is an ideal time to execute a pension buy-out, given the continued funded status volatility, new mortality assumptions that will increase DB plan liabilities, and increasing Pension Benefit Guarantee Corporation premiums,” says Peggy McDonald, senior vice president and actuary on Prudential Retirement’s pension risk transfer team. “Executing a successful buy-out requires a significant amount of coordination among several stakeholders, which means it’s never too early to prepare, whether a buy-out is imminent, a few years away or only a consideration.”