Understanding PRT: A Checklist for Implementing a Pension Risk Transfer

In the final session of the ISS Media 2022 Understanding PRT virtual conference, experts discussed how to execute a pension risk transfer transaction, providing detailed steps and a timeline on how plan sponsors can remove the risk from their balance sheets.

Data cleanup takes the top spot on the checklist and is an underappreciated part of the process, said Kate Pizzi, partner, senior consultant, Fiducient Advisors. There is growing scrutiny from the U.S. Department of Labor and the Pension Benefit Guaranty Corporation regarding PRT transactions, and data cleanup will help to reduce the cost and risk involved in termination.

“This important first step is essential to making sure the rest of the process goes as smoothly as possible. If you don’t get the benefit payment information right at the front end, that can derail the whole process,” Pizzi warned. “Even before you are thinking about potentially terminating the plan or another risk transfer activity, focus on that data.”

Pizzi said there are a few important data elements that should be reviewed, as they can be key factors in lowering costs and reducing risk.

“One step that is definitely worthwhile would be finding missing participants. The PBGC has a facility to help you out if, in fact, you can’t find missing participants. If you don’t know how to locate your participants, it’s going to be very difficult to transfer that risk over to an annuity provider on behalf of that participant,” Pizzi said. “If in fact you do have an annuity provider that is willing to take that risk, you are likely going to have to pay up in order for them to take those additional risks.”

Another point that can sometimes be overlooked is required minimum distribution dates, Pizzi said. Some beneficiaries can be past key dates and require distributions either before, during or after a PRT transaction.

“Another element that is overlooked but important is doing recurring death audits,” Pizzi noted.

She cited the example of a retiree who is already in receipt of their benefit. If there is a contingent spousal annuity tied to that payment, but the spouse has since passed away and the plan’s data does not reflect this, the plan is likely paying more for that annuity transfer than necessary. For very large plans, this is even more essential.

Offering another perspective, Glenn O’Brien, managing director, head of U.S. market, Prudential, said the data standard for an annuity transaction has one of the highest thresholds associated with pension plan management. This is because of the irrevocable nature of PRT transactions.

“Once the assets leave the ERISA jurisdiction, they come to the insurance company framework, and the owner of the assets and liabilities is the insurance company,” O’Brien said. “For the insurer, it is critical to have the ability to assess and underwrite the transaction correctly.”

O’Brien said the issue of missing participants and their associated data is particularly important.

“If we have very high-quality data, it gives us just a very high threshold of confidence that we’re going to be able to track and find somebody into the future,” he explained.

As firms move on from cleaning data, they must then think about the financial and accounting implications that come with PRT, said Brent Hartman, a CAPTRUST investment strategist who moderated the panel. In some cases, plan sponsors may actually be worried their firm won’t be able to take the balance sheet hit from terminating a pension plan.

“The first and foremost consideration, from this point of view, is figuring out how you preserve the economic situation that you find yourself in now,” O’Brien said. “For people who want to reduce risk who are worried about the balance sheet hit from any sort of settlement, a buy-in is a really good solution.”

A buy-in can be thought of as an asset class decision, as opposed to the purchase of an annuity, O’Brien explained. A buy-in can also be thought about as creating a simple asset class that has longevity protection.

“It’s cash-flow matched and guaranteed to sit as an asset of the plan, until more money is put into the plan or a sponsor does something active,” he said. “It doesn’t have to be all or nothing. You can take steps to start incrementally making your way into reducing risking.”

Pizzi noted that, in light of regulations implemented by the American Rescue Plan Act in early 2021, there has been a reduced cash strain on some plan sponsors that are not as well funded. This includes reducing minimum required contributions, which can allow some sponsors more flexibility, meaning their end game may not have to be termination. Sponsors can instead possibly focus on finding opportunities to reduce their PBGC premium.

Another point to note is that a lot of employers absorb pension plans through an acquisition, said Michael Devlin, BCG Pension Risk Consultants principal. He has spent time with people who did not grow up in a world where pension plans were common, noting that it is important to help such employers make informed decisions. This will involve going through their revenue expectations to help them understand what impact there will be to their profit and loss statements.  

Offering a legal perspective on the funding status of plans and preparing for a PRT strategy, George Schein, Nationwide Advanced Consulting Group technical director, emphasized how small plans that aren’t as well funded may want to pursue PRT, simply to get the plan off their books and to reduce PBGC expenses. However, they may face difficulty moving down this road, for example, because they may not be permitted to offer a lump-sum window if they are not at least 80% funded.