Data and Research October 23, 2020

PBGC Reports Effect of Pension Risk Transfers on Its Premium Income

The agency could see a premium income loss of $196 million for the 2019 premium payment year, but certain trade-offs make it hard to tell if the PBGC’s future net financial position will be strengthened or weakened.

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Eight percent of plans covered by the Pension Benefit Guaranty Corporation (PBGC) performed a risk transfer activity (RTA) during the 2015 to 2018 period.

Risk transfers are one of the methods used by defined benefit (DB) plan sponsors to reduce the financial risks associated with sponsoring their plans. Risk transfer transactions reduce some or all the pension plan’s liability and risk by offering lump-sum distributions to participants or by purchasing annuities from insurance companies to provide participants’ promised benefits. The PBGC revised premium filing procedures in 2015 to require after-the-fact reporting of RTA.

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Data collected from PBGC premium filings shows 44.8% of large single-employer plans (those with more than 1,000 participants) performed an RTA during the 2015 to 2018 period. Nearly all (92.6%) plans that performed an RTA during the period provided a lump-sum distribution window, compared with only 18.8% of plans that opted to purchase annuities.

The PBGC notes in its recent report of the data that 2.4 million participants received either a lump-sum distribution or an annuity as part of a risk transfer transaction, and, thus, are no longer participating in their DB plan or, in the case of a risk transfer, are not covered by PBGC insurance. These participants represent 7.9% of the 30.9 million reported to be participating in DB plans in 2014. Sixty-three percent of all participants affected by an RTA during the 2014 to 2018 period received a distribution from their plan through the election of a lump-sum distribution.

Effect on PBGC Income

Single-employer DB plans pay a flat-rate premium for each participant in the plan. For 2019, the flat-rate premium was $80 per participant. For illustrative purposes, the PBGC assumed the participants leaving the single-employer program through RTAs would not have left the system by some other cause during the 2015 through 2018 period. In that case, the 2,444,460 participants removed through RTAs from 2015 through 2018 represent a flat-rate premium income loss to PBGC of $196 million for the 2019 premium payment year. This represents 8.7% of the $2.236 billion flat-rate premium income PBGC’s single-employer program is estimated to receive from plans for the 2019 premium payment year.

However, the agency notes that there are other factors to consider when projecting flat-rate premium income loss from RTAs. Participants removed from the system through RTAs would have eventually left the system for some other reason, it says, so the flat-rate premium income lost due to a participant’s removal is not an annual loss in perpetuity. Participant counts in single-employer plans are reduced for other non-RTA reasons, such as mortality, election of a lump sum or an annuity purchase not associated with an RTA, and plan termination.

In addition to the flat rate premium, underfunded single-employer pension plans pay a variable-rate premium (VRP) based on the amount of the plan’s underfunding, up to a cap based on the plan’s participant count. For the 2019 premium filing year, the VRP rate was $43 per $1,000 of unfunded vested benefits, with a cap of $541 per participant.

“Reducing the VRP may be a factor in a sponsor’s decision to perform an RTA, particularly if the plan is paying VRPs at or near the per-participant cap,” the report says. The data shows that plans paying VRPs at the per-participant cap performed RTAs at a rate more than three times greater than all other plans (8.79% vs 2.74% from 2015 through 2018). It also shows VRPs appear to be more impactful on a small plan’s likelihood of performing an RTA than a large plan.

The impact of RTAs on PBGC’s VRP income is not easily determined, since a plan’s underfunding (and subsequent VRPs) are determined by factors not directly related to the RTA. However, the agency used the participant reduction in plans paying the per-participant VRP cap as a source for a rough estimation. Using the simplified assumption that plans paying the VRP cap in the year in which they performed an RTA will continue to pay the cap in the subsequent year (and would have continued to pay the cap had they not performed an RTA), the VRP income lost from those plans will roughly equal the VRP cap multiplied by the number of participants removed through an RTA, PBGC explains.

According to 2018 premium filings, 168 plans that were paying the VRP cap performed an RTA, removing a total of 117,050 participants. User the PBGC’s assumption, those 117,050 participants represent a “loss” of premium collections of $63 million, based on the $541 per-participant VRP cap applicable to the 2019 premium filing year. This represents only 1.3% of the $4.77 billion VRP income the agency’s single-employer program is estimated to receive from plans for the 2019 premium payment year.

However, the PBGC notes that not all plans performing RTAs are currently at the VRP cap. “It is possible that the removal of participants through RTAs could cause a plan not at the VRP cap to hit the cap, resulting in additional lost income for PBGC. Thus, the $63 million income loss from the simplified calculations of plans currently at the VRP cap may represent only a portion of total VRP loss due to RTAs,” the report says.

While RTAs represent a loss of future premium income to PBGC’s single-employer program, they also reduce the participant population and the benefits that PBGC is responsible for insuring. “This raises the question of whether, on balance, PBGC’s future net financial position is strengthened or weakened by RTA activity,” the report states.

The agency looked at whether a plan performing an RTA is more or less likely to present a claim to the PBGC after the RTA is completed, and how the RTA affects the PBGC’s exposure (i.e., the plan’s unfunded guaranteed benefits). One thing it found is that the RTA rate among large plans sponsored by financially weak companies does not significantly differ from the RTA rate among other large plans (47% vs. 44.2%). Additionally, the proportion of total participants removed through RTAs during the study period was similar between plans sponsored by financially weak companies and other plans.

“As for whether RTAs impact the size of a potential future claim to PBGC, we do not currently have enough data to determine trends in claim size following an RTA,” the agency concluded.

Participants October 23, 2020

Gen X Amenable to In-Plan Guarantees

Gen Xers are in unique situations for which they need education and help to boost their retirement readiness. 

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A new study from Allianz Life found that retirement plan participants—particularly Generation Xers—are increasingly interested in guaranteed retirement income options.

Born between 1965 and 1980, members of Generation X are between the ages of 40 and 55. Its older members are beginning to realize that retirement is fast approaching and that they might not be as prepared as they should be, Matt Gray, assistant vice president of worksite solutions at Allianz Life Insurance Co. of North America tells PLANADVISER.

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“They have also lived through at least two significant market crashes,” he says, referring to the dot-com crash of 2001 and the Great Recession of 2008. “The current volatility they have been seeing as a result of the coronavirus pandemic is also making them worried.”

Among all age groups, 71% of participants in retirement plans would like an option that offers guaranteed income for life. This jumps to 75% for Gen Xers, but declines to 67% for Millennials, who—having been born between 1981 and 1996 and ranging in age between 24 and 39—are further away from retirement.

Among all workers, 55% are worried that the money they have saved in their employer-sponsored retirement plan will run out, and, again, this figure rises for Gen Xers, to 69%. Among Millennials, 56% are worried the savings in their 401(k) or other workplace retirement plan will run out in their golden years, and this is true for only 45% of Baby Boomers.

Fifty-eight percent of workers would be receptive to having an annuity offered in their plan, and 68% would like a product to protect them against market downturns, the study found.

Gray says that given their proximity to retirement age, Gen Xers’ concerns do not surprise him, but he is rather stunned “to see such an intense focus on protection.” This wake-up call is, in a sense, a good thing for Generation X, as its members still have 15 to 30 years to continue to save, should they retire at age 70, Gray says. “Most of them are in their peak earning years, and there is still enough time for them to adequately prepare for retirement if they act.”

He adds that the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which has implemented a safe harbor and allowed portability for annuities inside retirement plans, is a true gift from the government for Millennials, who are likely to be the first generation to be offered in-plan guaranteed options. “They are lucky to be inheriting a much better tool set,” Gray says. “You are going to see a lot of innovation coming. These are two good things in their favor that can help them overcome this worry.”

He adds that he expects future surveys Allianz conducts in the next 10 to 15 years to show Millennials sharing the same concerns as Gen Xers.

Thérèse Wolfe, a tax principal with UHY Advisors, says that besides seeing retirement on the horizon, many Gen Xers are taking care of both aging parents and children, making them the newest “sandwich generation.” Gen Xers are also the first generation to have valid concerns about Social Security funds not being there for them in retirement, Wolfe says.

She reports that many of her older Gen X and Baby Boomer clients are “reinventing themselves” by taking on second careers to remain longer in the workforce to make up for savings shortfalls.

Aadil Zaman, a partner at Wall Street Alliance Group, which serves high-net-worth clients, says he encourages his Generation X clients to save as much as they possibly can in their retirement plan. “In our experience, more often than not, they are not saving enough, especially those in their 50s,” Zaman says. “Even the high-net-worth people earning a lot don’t have much to show for it because they haven’t been conscientious.”

Zaman says he is not a proponent of insurance products because of their costs and the current low-interest rate environment. Rather, he encourages his clients to have a well-diversified portfolio of equities and bonds, 50/50, held in mutual funds and exchange-traded funds (ETFs). “The likelihood of the market being higher 10 years from now is almost 100%,” Zaman says.

He also is a proponent of gold as an investment, as well as whole life insurance. He advocates that those closer to retirement increase their bond holdings so that they are “less susceptible to market declines.”

Zaman says that, overall, Generation X needs much more education about the importance of having a diversified portfolio and saving enough to put themselves in a solid position at retirement.

Gray concludes that he hopes “great plan advisers and consultants will help plan sponsors and participants understand in-plan guarantee solutions and how they can improve outcomes. It is a great time for advisers to learn more about these solutions. They will enhance the value they bring to sponsors and participants alike.” As well, Gray continues, “there is an onus on insurance companies providing these guarantees to make them simple for advisers, sponsors and participants to understand and use.”

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