Data and Research May 23, 2024

Pension Risk Transfer Market Sets Q1 Record

The first quarter of 2024 has already seen two jumbo PRT deals, with Verizon and Shell offloading their pension liabilities.

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The first quarter of this year marked was the largest first quarter on record, as estimated $15 billion in pension risk transfers closed in the period. According to Legal & General Retirement America, the activity significantly outperformed the previous record of $6.3 billion in 2023 and nearly triple the 2022 amount of $5.3 billion.

LGRA found that jumbo transactions continue to be the driving force behind the market’s strong performance, as two transactions that closed in Q1 totaled $11 billion. Verizon Communications Inc. completed a $5.9 billion PRT deal with Prudential Insurance Co. of America and RGA Reinsurance Co. in March, and Shell USA, Inc. completed a $4.9 billion deal with Prudential in February.

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In addition, LGRA stated in its new market update that U.S. pension funding status remains high and plays a role in the number of transactions that come to market. For example, in April 2024, the U.S. pension funding ratio was 107.6%, according to LGIM America.

As funded levels stay elevated, LGRA predicts that there will be continued demand for de-risking from plan sponsors who are in a good position to complete a PRT.

However, in an analysis of U.S. pension funded status in April, actuarial and investment consulting firm Agilis cautioned that pension plan sponsors looking to go through with a PRT may “want to do so quickly,” as the likelihood the Fed will drop interest rates this year could rise depending on how economic data turns out in the coming weeks and months.

Looking ahead, LGRA estimated the first half of 2024 will close at around $22 billion in PRT transactions, which is in line with what was seen in the first half of 2023. With jumbo transactions driving the most total market volume, LGRA expects at least three more to close this year.

Aon’s recent U.S. Pension Risk Transfer Report predicted that the PRT market will likely exceed $40 billion in premiums by the end of 2024. In addition to funded status improvement and higher interest rates, Aon attributed growing interest in PRTs to increasing Pension Benefit Guaranty Corporation premiums. In 2024, premiums rose to $101 per participant and $52 per $1,000 for the underfunded variable rate, Aon found.

Compliance May 23, 2024

SEC Might Drop Swing Pricing from Mutual Fund Liquidity Proposal

Instead, they would likely adopt liquidity fees, though Chair Gensler did not say so explicitly.

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Securities and Exchange Commission Chairman Gary Gensler suggested that the SEC might choose mandatory liquidity fees over swing pricing for mutual funds in the open-end fund liquidity rule at the Investment Company Institute 2024 Leadership Summit in an interview with ICI CEO Eric Pan.

The rule, first proposed in November 2022, would impose mandatory swing pricing on mutual funds. Swing pricing is a pricing method whereby the costs of redeeming shares in a mutual fund are passed on to the redeemer, which can limit the effect of a panic sale in stressful times. The proposal also contained an alternative based on liquidity fees, which would impose a redemption fee if a certain net redemption threshold is met.

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The SEC adopted liquidity fees for money market funds in July 2023 in a separate rulemaking. This is relevant to its mutual funding approach because the initial proposal likewise contained swing pricing and liquidity fees as alternative options, and the SEC went with liquidity fees in the end.

For institutional prime and tax-exempt MMFs, if daily net outflows exceed 5% of the fund’s value, the fund must implement a fee for new redemptions that covers the cost of those redemptions. That rule also required MMFs to hold at least 50% of their assets in weekly liquid assets, up from the previous 30% requirement.

The swing pricing proposal received industry pushback in the past, including from the ICI, which argued that investor dilution was not a genuine risk for mutual fund holders.

Gensler stressed at the ICI Summit that the mutual fund proposal also described “liquidity fees as an alternative” to swing pricing, and expressed regret that commenters did not comment more on that aspect of the proposal. Pan answered that the proposal had “no description on how the fee would operate or what it would look like” and therefore did not see it as the “core” of the proposal or fit for detailed feedback.

Michael Hadley, a partner at Davis & Harman LLP, spoke to this issue of alternatives: “The SEC’s proposal had a few high-level ideas that could be alternatives, but they were not well-formed.  If the SEC is going to suggest an alternative, which I think they should, then it is appropriate to release a new proposal so that the industry can provide meaningful input.”

Gensler said he stands by and is proud of the MMF rule, which takes effect in October, “I think the system will be safer in October.” He added that “we heard from many people not to do swing pricing [for MMFs] and we went with liquidity fees.” The chairman left unsaid if similar popular opposition to swing pricing for mutual funds, including from Democratic members of Congress, would cause a similar response for mutual funds.

Gensler also spoke to mutual funds and liquidity issues at the SEC’s 2024 conference on emerging trends in asset management on May 16. He explained that mutual funds and MMFs present risk to the system because they can be redeemed daily but not everything in their portfolio can, which can be problematic in times of stress and high redemptions.

He then turned to a similar product regulated by banking regulators and not the SEC: collective investment trusts. Gensler expressed concern that “rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, requirement for regular reporting on holdings to investors, or requirement for an independent board.”

He added that “we know from history that financial fires can spread from regulatory gaps, including when regulations don’t treat like activities alike.”

Gensler said that he “asked staff to consult with bank regulators on how to best mitigate for regulatory gaps between collective investment funds and open-end funds.”

 

 

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