Considerations for Pension Buy-Ins

A buy-in might be of interest if the plan sponsor wants to transfer some risk to an insurer without having to incur the one-time settlement accounting cost, Jerry Levy, principal and consulting actuary for Mercer, as well as author of Mercer’s Retirement Perspective, “Pension Risk Transfers Revisited,” told PLANSPONSOR.

This option provides an opportunity to dollar-cost average into the annuity market. Instead of purchasing the annuities at once, the plan sponsor could use a series of buy-ins to reduce risk and avoid settlement accounting, according to Mercer’s paper. When accounting is “no longer a roadblock,” the paper adds, a buy-in can be converted to a buy-out.

For  pension  plans  whose  actuarial  liabilities  exceed  the value of their assets, buy-ins and swaps may be preferable to buyouts because they do not  require  that  the  asset-liability  gap  be  immediately  recognized  as a  loss, according to a white paper by John Kiff, senior financial sector expert at the International Monetary Fund. The white paper, “Longevity Risk Transfer Markets: a Credible Pension Scheme De-Risking Option,” is part of a report recently published by Clear Path Analysis, “Pension Plan De-Risking, North America.” Buy-ins and swaps can be used to hedge the longevity risk associated with specific groups of the underlying retiree population, the paper added.

On the flip side, buy-ins pose some disadvantages. Plan-related expenses are not reduced because the plan bears the continuing cost of administration, Levy said. In addition, Pension Benefit Guaranty Corp. (PBGC) premiums continue to apply for the portion of the plan under the buy-ins.

Although buy-ins have generated interest, they are still much less common in the U.S. than other places, Levy said (see “Pru Completes Nation’s First Pension Buy-In”). “I would say there’s a lot more interest,” he added, “[but] I don’t know if we’re seeing more activity.”

Levy speculates buy-in activity is low because a limited number of insurance companies offer it. Ryan McGlothlin, managing director at P-Solve, said he does not think insurance companies are the cause of low usage; rather, he thinks it is because buy-ins do not necessarily solve a major problem for plan sponsors. “The buy-in is an interesting idea but the only thing that it really solves for a plan sponsor is that it takes longevity risk off the table,” he said. “In the hierarchy of risks plan sponsors are trying to deal with, [longevity risk is] relatively low.”

Permanency is another disadvantage of buy-ins, McGlothlin said. Once a plan completes a buy-in, undoing that contract is almost impossible. “So you’re locked into that product,” he cautioned, “and if you want to change your strategy down the line, it becomes exceptionally difficult to do.”

Although buy-ins have become more prevalent in the U.K., McGlothlin emphasized this does not reflect the future of U.S. buy-ins. In the U.K., the actuarial value can be more conservative than the insurance company’s price. “But the U.K. market and U.S. market are very different in that respect,” he added.