COVID-19 Has Put Some PRTs Behind Schedule

Just as the effects of the COVID-19 pandemic have stalled implementation of certain plan decisions by defined contribution (DC) plan sponsors, they may have defined benefit (DB) plan sponsors rethinking the timing of pension risk transfers (PRTs). 

According to Milliman, a PRT is currently more expensive. The latest results of the Milliman Pension Buyout Index (MPBI) found that, during March, the projected cost to transfer pension risk to an insurer increased from 105.2% to 105.7% of a plan’s total liabilities. This means the estimated retiree PRT cost for the month is now 5.7% more than those plans’ retiree accumulated benefit obligation (ABO). March’s increase is the result of discount rates increasing 80 basis points (bps), compared to a 71-basis-point rise for annuity purchase rates, so the relative cost of annuities climbed slightly, Milliman says.

 “Plan sponsors are currently monitoring where interest rates are,” notes Mary Leong, a consulting actuary at Milliman and co-author of the study.

She explains that the decline in interest rates affects not only annuity pricing, but a plan’s funded status as well. “It increases how much they’re going to need to contribute to go forward with a pension risk transfer,” she says.

Plan funded status, which compares the assets of the plan to its future liabilities—or projected benefit obligation (PBO)—plays a large factor in the timing of a PRT. Plan sponsors want their plans to be well-funded to lessen the amount they will have to contribute to transfer PBOs to insurers. Lower interest rates result in a higher PBO valuation, but plans’ funded status has also been hit by the market decline caused by the COVID-19 pandemic.

DB plan sponsors may need to take action to get back on track to implement a PRT.

There are different strategies plan sponsors can take, Leong says. For example, sponsors can talk with their consulting actuary about whether they must increase contributions to make up for the loss in funded status, or whether they should change their timing and delay the PRT until the plan can recoup some of its losses, she says. “Trying to get back on track is a combination of markets coming back, interest rates coming back, and making contributions or finding some other way to fund that shortfall or loss,” Leong adds.

Linda K. Stone, a senior pension fellow at the American Academy of Actuaries, says when deciding whether a PRT is a good deal or not, sponsors are looking at the value of the liabilities, compared with the price of transferring that liability to an insurance company. For some plan sponsors that are looking for cash in any way they can to run their businesses, they may still consider making contributions to their DB plans to implement a PRT.

Some plan sponsors may be concerned with the economic cost of maintaining their DB plan. Stone says many are making small annuity purchases—or implementing a partial PRT—to lessen Pension Benefit Guaranty Corporation (PBGC) variable premium costs. Plan sponsors may implement a lump-sum payment window to terminated, vested participants or only transfer liabilities of retirees to insurers. “When you think about what you’re paying administrators to maintain those records, and what you’re paying for fixed and variable premiums per person, that’s why they have been transferring these smaller amounts,” she says.

Stone notes that as the industry studies the long-term effects of the pandemic post-COVID-19, it will be interesting to understand on what basis employers are making decisions. “Looking at the pension plans and the fallout from COVID, what we’ve seen is plan sponsors take different actions than they would have beforehand, since their business situation has changed so much,” she says.

She paints two scenarios common to those plan sponsors facing difficult plan decisions in this environment. On one hand, handling the process of a PRT transaction can be tough to navigate for plan participants. When questioning whether to implement a lump-sum window or purchase an annuity for their pension obligations, sponsors have to consider administrative issues, which can include requiring spousal consent or notarization of documents, even when social distancing is being practiced.

On the other hand, as more individuals are laid off and looking for cash to pay bills, a lump-sum window is a way to provide money to those individuals, Stone notes. “If people need food on the table and rent, this can be a valuable source of funds, she says.

Leong shares a similar idea, but notes that during these unprecedented times, as most employers are putting their worker’s needs first, retirement plan decisions are going on the back burner. “Every plan sponsor has a unique situation, and in this environment, there’s a lot of other factors outside the plan that each business is considering,” she says.