Pension Perspective

A view of the current pension de-risking industry
Wayne Daniel

Pension plan liabilities continue to grow alongside an aging population. For many defined benefit (DB) plan sponsors, the need to find a way to match those liabilities is leading them to consider de-risking their plans. Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR and PLANADVISER, spoke with MetLife’s Head of U.S. Pensions Wayne Daniel about the options and solutions for plan sponsors embarking on a de-risking strategy.

PS: Wayne, you were recently named head of U.S. Pensions, which is part of the Corporate Benefit Funding (CBF) business unit at MetLife. You’ve been with MetLife for some time, so what made this opportunity attractive?

Daniel: Having spent the last few years leading MetLife’s pensions operation in the U.K. and Ireland, and serving as part of the CBF leadership team, I am familiar with the U.S.-based team and the great work they do here. It was an opportunity to bring my 25-plus years of global insurance experience in pension risk transfer, reinsurance and longevity markets to a very strong team that I think is well-positioned for future growth. The U.S. pension de-risking market had record years in 2012 and 2013, and there are bullish predictions that the sales growth in the market—the de-risking activity—will continue, so obviously it’s an attractive time to take on the leadership of the U.S. team.

As you may know, pension risk management—which includes both pension risk transfer and risk mitigation strategies—is a core element of MetLife’s business and has been for over 90 years. According to LIMRA’s 2013 year-end sales report, MetLife has a 45% market share and is a leading pension risk transfer provider. I’m looking forward to maintaining and growing that share in the coming months and years.

PS: Coming from the U.K. perspective, what aspects of the U.S. landscape are distinct from those in the U.K.?

Daniel: Well, both have idiosyncratic differences, but there are similar overall drivers of demand.

There is tax law and pension regulation that is specific to each, but fundamentally the challenge that the industry and the plan sponsors are facing is the same.

We have huge amounts of defined benefit liabilities that have built up over the past few decades, and plan sponsors on both sides of the Atlantic have the responsibility for ensuring that those liabilities are matched. The de-risking process is addressing the issue as it removes the volatility and unknown expense of managing pension liabilities from the plan sponsor.

In the U.K., we have moved to mark-to-market accounting faster and further than the U.S., and this has forced earlier recognition of the true cost of these DB promises that were made by corporates and plan sponsors.

Also, in the U.K., plans had to implement more realistic rates of improvement in mortality, further increasing the pressure on defined benefit plans.

Now, we see similar structural features driving de-risking demand in the U.S., as the move to mark-to-market accounting is underway. We also see, with new mortality tables, additions to the costs and uncertainties for plan sponsors.

Plus, on both sides we’ve seen the regulatory cost of operating a defined benefit plan increase. In the U.K., we have Pension Protection Fund (PPF) levies. In the U.S., we have the Pension Benefit Guaranty Corp. (PBGC). Those premiums are projected to increase for the next few years, further adding to the cost for plan sponsors.

PS: What particular initiatives do you have for MetLife in the coming months?

Daniel: MetLife is well-positioned in the U.S. pension de-risking market, and my remit is to build on the existing strengths of our operation to leverage the scale that MetLife brings to the market. This is an extremely long-duration business, so capital strength and excellence in customer service are very important. I believe what MetLife brings to sponsors is the intellectual capital to design options tailored to their company’s unique situation, the expertise to manage a mortality pool until the last retiree dies and the financial strength to keep its promises 25, 50 or even 75 years in the future.

We fully intend to play a part in negotiating any future potential jumbo transactions in the U.S. We didn’t see any in 2013, but there is a healthy pipeline, and MetLife is actively engaging with these plan sponsors and their advisers.

In the short term, I am looking forward to meeting with plan sponsors—whether they are already considering a pension risk transfer or otherwise engaged in better managing their plan’s volatility—to get their perspective on the challenges and goals they face. My team and I will also be meeting with leading pension consultants, with whom we already have strong relationships in the U.S.

And of course, I intend to fully immerse myself in the business—both our strategy and the legislative and regulatory developments that impact the business in the U.S.

PS: How does the economic climate of the U.S. alter the environment for pension de-risking strategies, whether buyouts, buy-ins or other transactions?

Daniel: We’ve seen huge global changes in the economic landscape since the financial crisis in 2008/2009. Certainly the persistently low interest-rate environment does not help plan sponsors and makes managing the risks associated with the liabilities of a DB plan very challenging. We’ve seen additional regulation in response to the crisis, adding to costs and uncertainty.

Since risks associated with pension plans can impact a variety of corporate performance measures, more and more companies are now taking concrete steps to de-risk their pension plans. In the current economic climate, the benefits of adopting a de-risking strategy become even clearer. It’s been prioritized by plan sponsors and corporates in many different markets, and the sponsors are aware that this is a multi-year transaction, and they need to start taking steps and planning towards an eventual de-risking.

PS: What are some of the different options plan sponsors have if they are looking to de-risk their portfolios?

Daniel: There are several ways to mitigate pension risk, and it may be helpful for plan sponsors to think of de-risking as a continuum of choices with multiple steps they can take before and during the process, rather than as a “once-and-done” transaction.

Think of it as a spectrum, and it depends on the position of the plan sponsor and what the plan sponsor is looking to achieve. At one end of the spectrum, we have a full buyout where all of the liabilities and assets are transferred to an insurer; at another end, managing the liabilities and the assets, there is a liability-driven investing (LDI) strategy. Then there’s a range in between where partial risk transfer could be contemplated, and this could involve the purchase of a group annuity from an insurer.

The most important thing to note is that the stages in between can be tailored to meet the requirements of the plan when the plan may not be in a position to go to full buyout, and this could be part of a flexible multi-year de-risking flight path. As the plan funded status improves and they’ve already partially de-risked some segments of the plan, it is easier to reach full buyout in the future.

Pension risk transfer indices from consulting firms, which track the attractiveness of annuitizing pension liabilities in relation to the ongoing costs of maintaining those liabilities, have shown that it may be more cost-effective to purchase an annuity than to maintain liabilities on an ongoing basis.


PS: Now, for those who are looking at this concept and are intrigued by it, which plan sponsors are good candidates for various de-risking strategies?

Daniel: The single most important thing is to have a good funded status. If a plan’s assets do not fully cover its liabilities on a realistic basis, allowing for future mortality improvement, then achieving a full buyout in the market will require an additional cash contribution from the plan sponsor.

We saw a very good improvement in the average pension plan funded status during 2013, and that was an important driver behind the record sales in the market. Nearly $4 billion of de-risking activity occurred in 2013. As we recover from the financial crisis, if plans manage their assets and liabilities well, and keep an eye on stabilizing and improving their funded status, they can improve the likelihood that they will be able to afford partial and eventually full close-out in the future. In general, the better funded a plan is, the more financial flexibility it has to optimize its risk management strategy.

PS: When is a good time for those good candidates to think about de-risking strategies?

Daniel: Plan sponsors should have been thinking about it yesterday! It’s important that plan sponsors have a clear view of what they’re trying to accomplish and how their current plan fits in with their overall business and talent retention goals. They also need to have a clear view of a plan’s true economic liability—which includes ongoing administrative costs, PBGC premiums and investment expenses—rather than just the current accounting liability, in order to make a sound decision and understand the impact on the accounts.

PS: What are some steps that plan sponsors can take?

Daniel: There is a range of steps plan sponsors can take to develop an effective flight path strategy: look at the liabilities of the scheme, contribution levels, benefit levels, whether it is frozen or mixed or allows future benefit accrual; manage the assets carefully and improve the funded status and have that be as stable as possible. An active LDI strategy can help enable a more stable funding approach. Additional considerations include determining the cost of—and establishing a timeline for—de-risking, and developing a participant communications strategy in advance of any pension risk transfer action.

Advisers are very well-equipped to set out those steps for the plan sponsor and guide them through. At various stages, it is essential that the plan sponsors build in adequate timelines and messaging to communicate with all stakeholders and members of the plans.

Obviously, MetLife is well-placed to assist plan sponsors and their advisers through the various stages of de-risking.