Most Employers Interested in Pension Risk Transfer March
07, 2017 LIMRA
A new LIMRA Secure Retirement Institute research
study finds 8 in 10 employers with a traditional defined benefit
pension plan are interested in pension risk transfer (PRT).
Since 2014, there has been a significant shift in plan sponsors
interest in PRT. Today, 4 in 10 plan sponsors are very interested
in PRT, a 10 percentage-point increase from the results of a 2014
Institute study of DB plan sponsors.
A pension risk transfer allows an employer to
transfer all or a portion of its pension liability to an insurer.
In doing so, an employer can remove the liability from its
balance sheet and reduce the volatility of the plan’s funded
Institute research shows PRT buy-out sales totaled
$13.7 billion in 2016, almost one percent higher than prior year
and the second highest annual total recorded.
For those employers with DB plans who are not
interested in PRT products, lack of knowledge is the top reason
given (40 percent). Another quarter say that they address their
pension risk through alternative means. The most common
alternative to PRT is liability-driven investing (LDI), which
seeks to limit the risk associated with market volatility by
precisely matching assets to liabilities. While this strategy can
lower investment risk, plan sponsors would still have to address
other risks (for example mortality and fiduciary risks) and to
pay Pension Benefit Guarantee Corporation (PBGC) premiums. Click Here to
More Corporate Pension Plans Transferring Risk,
Milliman reports April 13, 2017
Despite fluctuations, the largest pension plans
ended 2016 with their funded ratios little changed.
The 100 largest US corporate pension plans saw their
funded status drop to 81.2% for 2016, from 81.9% a year earlier,
according to actuarial firm Milliman. The $21.7 billion drop in
funding resulted from a rise in projected benefit obligations,
partially balanced by a rise in the market value of plan assets.
The 100 plans also witnessed quite a bit of
volatility in 2016, Seattle-based Milliman reported. “Investment
performance exceeded expectations, with the 100 largest US
pensions experiencing returns of 8.4% - compare that to 0.8% the
year prior,” said Zorast Wadia, an actuary and co-author of the
pension funding study, “but the volatile interest rate
environment saw the discount rate plummet by 30 basis points. In
2016, these dynamics resulted in a funded ratio that oscillated
back and forth for most of the year before the post-election
bump. The end result was a funded ratio of 81.2% - not that far
off from where we’ve been at the end of 2015 and 2014.”
Three factors buoyed the 100 largest corporate
plans. One was an investment return of 8.4% for 2016, outperforming
expectations. Another was employer contributions, which rose 38%
from 2015 levels. A third was a decline in estimated life
expectancies for the second year in a row, which helped cut
projected benefit obligations at several of these companies.
Some companies are planning to adopt an accounting
change to cut their pension expenses for fiscal year 2017. This
entails moving to spot interest rates that are based on the yield
curves of high-quality corporate bonds. For 2017, 46 companies in
the Milliman study said they intended to adopt this practice,
compared to 37 companies for 2016.
Plan sponsors also boosted their engagement in
strategies to transfer pension risk to insurance companies.
Pension risk transfers, together with pension risk settlement payments
to former plan participants who are not yet retired, rose to
$13.6 billion in 2016, from $11.6 billion in 2015 and included
such companies as Westrock, United Technologies, PepsiCo,
Hewlett-Packard, International Paper, and Verizon. By doing so, plan
sponsors also cut down on their required premium payments to the
Pension Benefit Guaranty Corporation. Link to Article
News from the Annual Enrolled Actuaries
BCG's iWatch drawing winner is Lee Kaminetzky,
Pension Actuaries LLC