Although the funded status of many defined benefit (DB) plans is improving, some plan sponsors find that the administration, costs and volatility of these plans is too much for their company to bear. Whether a plan is frozen or active, the concept of pension risk transfer (PRT) has caught on here in the U.S. To discuss this market and its trends, Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR and PLANADVISER, spoke with Pacific Life Insurance Company and Ernst & Young about their recently completed research paper on pension risk solutions, titled “Charting the Course: A framework to evaluate pension de-risking strategies.” She sat down with Russ Proctor and Marty Menin, both directors of institutional sales at Pacific Life; Jennifer Haid, a consultant in the insurance and actuarial advisory practice of Ernst & Young; and Adam Berk, who leads the human capital actuarial services at Ernst & Young. They shared their ideas on what plan sponsors need to know about the pension risk transfer market and how it could affect their plans in 2014 and beyond.
PS: From your perspective, what is driving the conversation today about pension risk transfer?
Proctor: Plans are much better funded now than they were in the recent past, so as they start to approach full funding again, that’s really encouraging a lot of them to start looking at solutions to take action and preserve that funded status.
Also, I think there’s been so much volatility over the past five years—plans that were 100% funded in 2008 quickly dropped below 80% and are now finally clawing their way back to 100% funded (Source: Milliman 100 Pension Funding Index, December 2013). Many plans are more focused now on trying to preserve that funded status and do not want it to drop again, as we’ve seen happen so many times in the past.
In addition, the continued changes in pension plan regulation, such as the recent increases in Pension Benefit Guaranty Corp. (PBGC) premiums, are causing plan sponsors to de-risk their plans and begin to move the liability off the balance sheet.
Many pension plans have already closed the plan to new entrants or fully frozen benefit accruals for all participants. This dramatically shortens the investment horizon for the plan. These plans are now focusing their investment decisions a lot more on pension risk transfer and de-risking the plans.
Finally, chief financial officers (CFOs) and other
executives are now focusing on the impact of funded status volatility on their
plan contributions and balance sheet. They understand better than ever that the
size of the pension liability compared to the size of their company can have a
significant effect on their overall
Berk: I would also note that there have been a few landmark transactions in the jumbo market that have paved the way for innovative and customized solutions, not only for larger organizations but for the mid-market as well. For example, we’ve seen more insurers and asset managers develop pension-specific solutions to meet some of the growing demand.
Pension plan sponsors are in relatively good shape today, and it’s much easier to address pension risk when you’re already in a strong position. So now is a great time, while plan sponsors are in that position of strength, to take action and address some of their pension risk.