PSNC 2018: Pension Risk Transfer Options

The transferring of risk, or de-risking, from defined benefit (DB) plans has become a focus of pension plan providers over the past few years.

Risk transfer or de-risking transactions addressing pension plan risks can include several options: the purchase of annuities from an insurance company that transfers liabilities for some or all plan participants (removing the risks cited above with respect to that liability from the plan sponsor); the payment of lump sums to pension plan participants that satisfy the liability of the plan for those participants (either through a one-time offer or a permanent plan feature); and the restructuring of plan investments to reduce risk to the plan sponsor.

At the 2018 PLANSPONSOR National Conference, David Hinderstein, president, Strategic Retirement Group, Inc., in White Plains, New York said, “Many pension plans are frozen and these plan sponsors have been waiting for something to happen. They are hoping and hope has become expensive.”

Maintaining a frozen pension plan is expensive, according to Hinderstein, and it means contributing fees to the Pension Benefit Guaranty Corporation (PBGC). The flat-rate-per-participant premium for single employer plan increased 130% since 2013. The variable rate is a percentage of a plans unfunded status. 

Hinderstein said, “Plan sponsors have begun to take action to deal with liabilities but there are a few service providers that can help plan sponsors keep their frozen plans which slows down the process. Why derisk? To help fund the plan they are derisking.”

An example of a partial risk transfer is how FedEx recently entered into an agreement to purchase a group annuity contract with Metropolitan Life Insurance Co. to transfer about $6 billion in pension plan obligations. By taking on a portion of the payment obligations of the FedEx DB plan, it will help the company secure its pension obligations and provide its retirees with financial security. Companies are chunking out their liabilities so that those funds do not grow.

In addition, many plan sponsors are offering terminated employees lump sums payments. Hinderstein said there is on average a 65% take rate.

Mike Devlin, principal, BCG Pension Risk Consultants, which specializes in assisting plan sponsors with managing their pension risk, stressed the importance of a plan sponsor keeping control of its plan as it derisks.  He said, “Restructuring the plan through an IRS determination letter can be complex and interest rates are unpredictable. Instead transact under your own conditions and you can predetermine the timing with the market as to what you do. Plus, never move all your retirees at one time. Figure out how much you will save over X amount time and do what makes sense economically.”

Michael Kozemchak, managing director at Institutional Investment Consulting interjected, “It’s going to cost more to keep the liabilities than to move them to an insurance company. It makes more sense to move it right now. Figure out what the annuity price needs to be for it to make sense financially for your plan.”

The fourth quarter of the year is very busy for these insurance companies according to Marty Menin, director of retirement solutions division at Pacific Life, specializing in pension risk transfer and other group annuity contract solutions. “[Insurance providers have many] other companies to look at that time and plan sponsors are back to losing control of their transaction. When insurance companies get busy they won’t be as competitive and you want the best price for the annuitization.”