Small Pension Plan Sponsors Fully Embrace PRT Transactions

Nearly 85% of pension plans paying PBGC premiums have less than 1,000 participants—so it only makes sense that small plans make up a significant proportion of the ERISA industry’s annual risk transfer business.

Dietrich and Associates, Inc. and United of Omaha recently hosted a webinar to discuss the way small- and micro-plan sponsors think about pension risk transfers (PRTs), suggesting small employers have embraced PRT transactions in a big way in the last handful of years.

According to experts from Dietrich and Associates, which specializes in supporting plan sponsors during the PRT process, it is simply incorrect to assume that large defined benefit (DB) pension plans are setting all the trends when it comes to offloading pension liability.

“Believe it or not, the small-plan market is the traditional annuitization market—there is 35 years of history here, and 80% of plans being annuitized today are small-market plans,” said Geoff Dietrich, executive vice president. “If you are a small plan sponsor and you don’t think PRT is available to you, we encourage you to look at your options. Of course the press coverage is not there for each small plan transfer, but they are still setting trends in terms of PRT transactions.”

Dietrich adds that partial settlements are very common in this marketplace. For example, an employer might target only terminated vested participants for a risk transfer, or those already retired and collecting an annuity.

“In most cases, small plan sponsors have not annuitized benefits before and thus they require the use of a specialist to make it work well,” Dietrich adds. “Under our approach, the plan sponsor works directly with an underwriter who guides the process, supported by an actuary, compliance specialist and recordkeeper. It’s a highly regulated and time-sensitive process, so expert support is invaluable.”

Sales executives with United of Omaha—one of a handful of affiliates of the Mutual of Omaha that supports small- and micro-plan PRT business—suggested that the last five years or longer “have been very exciting in this space.” The annual volume of termination business that the company serves since 2011 has grown nearly 10-times over, in fact. Some of the growth is reflective of the fact that the firm is writing slightly larger cases on average, but there is also strong evidence that the market is growing wider.

NEXT: How low can PRT go? 

According to United of Omaha, insurers in this space will generally look at a plan ranging down to $100,000 in assets/liabilities. “We’ve done 100 cases that are $10 million or under in this time frame,” one executive suggested. “When you really talk about the sweet spot that we are seeing right now, it’s actually between $100,000 and $5 million—that’s where most of the plans are, especially after all the lump sums that are occurring today.”

Similar to the larger market, there will be a lot of work required aligning stakeholder interests in order for a small- or micro-plan to successfully enact a PRT transaction. Employers generally come into the process with two fundamental motivations: They want to address longevity and investment risk, and they want to act before increasing Pension Benefit Guaranty Corporation (PBGC) premiums adds even more to the cost of running a pension plan. Employees, on the other hand, generally want PBGC coverage for their pension plan assets, and the resulting loss of PBGC insurance coverage following a PRT buyout can be concerning—especially if the plan sponsor and providers fail to effectively communicate the need for change and exactly how and why the PRT process will unfold. 

These two parties in semi-conflict will then inevitably interact with at least a small handful of service providers who will help get the transfer deal in place—likely to include advisers, legal resources and sales/service professionals from the insurer offering a bid for the PRT business. According to Dietrich and United of Omaha, it is important for all the parties to keep in mind the needs of the others—and to always negotiate ultimately with the best-interest of plan participants and beneficiaries in mind.