Pension Risk Transfers on the Rise

Pension-risk management is becoming a major concern for plan sponsors as buyouts rise at an alarming rate, according to research by global consulting firm Mercer.

“The robust demand for buyouts in the United States this year has exceeded our expectations. In spite of the prolonged low interest rate environment, we are seeing many companies looking to transfer pension risk,” says Lynn Esenwine, partner at Mercer.

The company finds that plan sponsors are executing buyouts in a shorter time frame and in a more competitive pricing environment. Its research indicates that volatile financial markets may open windows of opportunity. For example, a U.K.-based plan sponsor was offered a 10% discount by a larger insurer if the sponsor could transact within two weeks.

Foreign currency exchanges also hold impact on pension risk and buyouts, Mercer notes. The case for buyout of U.K. pension schemes linked to subsidiaries of U.S. parent companies is now stronger than at any stage in the past few years. The firm also found a higher volume of smaller pension deals are coming to market and an increasingly competitive insurance market has proved to be a catalyst for smaller deals coming to market in the U.S. 

Mercer says pension risk transfer interest varies by geography. The current market for pension risk transfer is slower than recent years in U.K. and Canada, but insurer capacity is unchanged leading to strong insurer appetite and greater competition for deals.

“As well as clients seeing shorter time frames to complete transactions, and achieving more competitive pricing, they are also saving PBGC premiums and administrative costs; all with the benefit of participants’ annuities being secured by highly rated insurance companies,” says Esenwine. 

Mercer recently launched the Mercer Pension Risk Exchange, an online platform designed to help plan sponsors monitor clients’ plan funded status, insurer pricing, and broader market conditions.