Market Conditions Continue to Fuel Pension Risk Transfers   

Defined benefit retirement plan sponsors expect the large volume of pension risk transfer transactions will continue, new data from MetLife shows.

As the U.S. pension risk transfer market continues to break records, 89% of defined benefit plan sponsors surveyed by MetLife revealed they intend to divest all of their DB pension liabilities, while 11% of respondents reported they never intend to completely divest, according to the MetLife 2023 Pension Risk Transfer Poll. Among the plan sponsors that plan to fully divest their liabilities, plans aim to do so in an average of 4.1 years, the data showed.

The current environment is favorable for de-risking and, if these conditions persist, Metlife anticipates continued growth in the market, Elizabeth Walsh, MetLife’s vice president for U.S. pensions, says by email. But eulogizing DB plans would be premature, she clarifies.

“There are still $3 trillion in plan assets held by private sector defined benefit plans—the majority of which is expected to be de-risked within the next decade, indicating a robust market for years to come,” Walsh says. “Plan sponsors should determine what they are trying to accomplish with their plan, where the plan fits in with other qualified plans they offer and how they can achieve the firm’s business and talent retention goals, in light of the macroeconomic environment, in a way that addresses the organization’s strategic focus and meets the needs of the plan participants.”

Macroeconomic concerns are the primary reason for plan sponsors initiating a transfer of their company’s pension liability to an insurer, according to MetLife.

The top reasons defined benefit plan sponsors cited for considering transferring the plan liabilities to an insurer include inflation (49%); market volatility (42%); rising interest rates (42%); increasing number of retirees (42%); favorable annuity buyout market pricing (35%); recessionary concerns (31%); Pension Benefit Guaranty Corporation actions (24%); the regulatory environment (18%); mortality changes due to COVID-19 (14%); and the geopolitical environment (10%). None of the surveyed plan sponsors said that hitting a funding status target triggered the plan to consider initiating a PRT.

Higher interest rates over the last 18 months have shored up funding for most plans and put them on solid footing to engage in a pension risk transfer now, Walsh noted.

For frozen DB plan sponsors, the 2023 market appears an excellent time to reduce risk, agrees John Lowell, a partner in October Three Consulting. But whether and when plan sponsors will pursue a PRT transaction is nuanced, Lowell says by email.

The sample size of the poll was 250 DB plan sponsors, Lowell notes, emphasizing the plan sponsors surveyed have plotted de-risking goals and intend to fully divest their liabilities in about four years’ time.  

Considering only the frozen pension plans with which he speaks, every plan would say “they intend to fully divest their liabilities,” Lowell says. “Of those, far more than not would say they have a target timetable of either three years or five years or, in the alternative, would tell you they would like to get their plan terminated in three to five years.”

The MetLife poll found that plan sponsors are finding it harder to justify their companies continuing to offer a DB pension benefit. The poll results found 94% of plan sponsors reported weighing their company’s DB plan value against the cost of the retirement benefit, and 91% of plan sponsors reported that the company DB plan receives significant focus from corporate management.

The most prevalent activity used by plan sponsors for a pension risk transfer include:

• Combination lump sum and buyout: 33%
• Buyout: 24%
• Lump sum: 24%
• Buy-in: 18%

“Plan sponsors should determine what they are trying to accomplish with their plan, where the plan fits in with other qualified plans they offer and how they can achieve the firm’s business and talent retention goals, in light of the macroeconomic environment, in a way that addresses the organization’s strategic focus and meets the needs of the plan participants,” Walsh adds. “Once a plan is in a well-funded position, there may not be an economic incentive for plan sponsors to continue to administer the plan. Transferring obligations to an insurance company is the only way to fully remove risks associated with those liabilities, specifically longevity risk and interest rate risk.”

Through the second quarter of 2023, pension risk transfer transactions were on a record-breaking pace, totaling $16.2 billion in the second quarter, a 31% surge from Q2 2022 and a new record for the quarter, according to data published in August by financial services association LIMRA. A mid-year report from Aon confirmed the torrid pace, identifying that the first half of the year saw plan sponsors complete a record 289 pension-risk-transfer transactions totaling $22.4 billion in premiums.

Speaking with clients and plan sponsors this year, none with fully open plans intend to fully divest their liabilities, Lowell says.

“While some are not financially able to [de-risk the DB plan] in the foreseeable future, it is always surprising when I encounter a sponsor of a frozen plan that does not have the goal of fully divesting those liabilities either in the short or medium term,” Lowell says. “That said, many are considering and/or have engaged in some form of de-risking. They might have offered one or more lump-sum windows to terminated vested participants and/or done one or more annuity purchases.”

In 2022, total PRT market sales reached $52 billion, surpassing the 2021 record when the market reached $38 billion in sales, MetLife data showed.

“On the heels of record setting PRT sales in 2022, the high-level of market activity will remain strong for the foreseeable future,” the firm stated in the report’s summary of key findings. “Most companies are evaluating the long-term value of defined benefit pension plan sponsorship.”

Lowell arrives at a separate conclusion: “The view of many sponsors that are committed to pensions on an ongoing basis is that there is unnecessary cost inherent in carrying long-term liabilities for participants with small benefits,” he says.

The MetLife 2023 Pension Risk Transfer Poll was conducted between July 5 and July 27. MetLife commissioned MMR Research Associates Inc. to conduct the online survey. Survey responses were received from 250 DB plan sponsors with $100 million or more in plan assets who have de-risking goals. This included 41% of plan sponsors who reported DB plan assets of $500 million or more.