PRT Still a Useful Tool for Plan Sponsors

The effects of the COVID-19 pandemic slowed pension risk transfer activity earlier in the year, but economic factors for transactions remain favorable and Q4 could be a record quarter.

The pandemic has slowed the pace of annuity sales for pension risk transfers (PRTs) in the U.S. somewhat this year, says George Palms, president of Legal & General Retirement America. “We expect it will be a $25 billion year versus $30 billion last year,” he says. “But, in light of the effects of COVID [on businesses], the effect on pension risk transfers has been minimal.”

Mark Paracer, assistant research director for the LIMRA Secure Retirement Institute (SRI), says the economic problems that have cropped up as a result of the pandemic have had a negative impact on PRT sales in 2020, both in terms of volume and dollars. “Buy-out sales as of June 30 totaled $6.7 billion, down 25% compared to the $8.9 billion recorded in the first half of 2019. The number of contracts sold fell by 23%,” he says.

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Palms says his firm has seen a change in types of transactions. “Early in the year, there was a high proportion of plan terminations,” he explains. “Plan sponsors immunized their bond portfolios and are working through the regulatory process of terminating their plans. They don’t want to pause their efforts.”

Now, there are more retiree-only deals, Palms adds. “These are simpler because the amount of money retirees are getting each month is known. There is more uncertainty when transferring pension obligations for employees who haven’t decided yet when to retire and what kind of annuity they will take,” he notes. “These are different components that will impact what benefits employees will get and the price of a pension buy-out transaction.”

There was a slowdown of PRT activity in the second quarter because plan sponsors were trying to raise liquidity to survive the crisis of the pandemic. But, Palms says, the market is now seeing a resurgence.

“The fourth quarter is typically a busy time as plan sponsors look to close out deals by year-end. In four of the past five years, the fourth quarter was the highest quarter for PRT premiums with 42% of the total premium occurring in that quarter,” Paracer says. “The urgency to close deals as of year-end is expected to hold in 2020 as employers look to reduce their PBGC [Pension Benefit Guaranty Corporation] premiums and other costs.”

Palms says one of his coworkers believes Q4 2020 will be “insane” in terms of the number of transactions. “It could be one of strongest fourth quarters on record,” he says.

Asked what effect the low interest rate environment has had on the price of annuity purchases in the U.S. so far this year, Palms says rates went down in March and April but credit spreads went up, so the total rate in terms of how companies price pension liabilities was the same or going down. “Pricing has remained quite attractive based on what I’m hearing from intermediaries,” he says.

He adds that another factor affecting pricing is that the PRT market is still a very healthy, competitive market, with 17 or 18 providers, so plan sponsors can access multiple bidders.

“My advice to a plan sponsor today is that a PRT transaction continues to be a very effective tool to manage risk,” Palms says. “I would recommend working with a knowledgeable intermediary to pick a time other than the fourth quarter when there may be fewer bidders on transactions than in other quarters. In any case, the market conditions remain favorable.”

SURVEY SAYS: Creative Ideas for Halloween 2020

NewsDash readers share how they will ‘celebrate’ Halloween, as the COVID-19 pandemic has put a wrench in the usual traditions.

Last week, I asked NewsDash readers, “Do you plan to participate in any Halloween traditions, and do you have any creative ideas for new ways to celebrate Halloween this year?”

Two-thirds (65.8%) of responding readers work in a plan sponsor role; 18.4% are recordkeepers/TPAs/investment consultants, 13.2% are advisers/consultants and 2.6% are attorneys.

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Decorating their homes (513%) was the most common Halloween tradition in which respondents plan to participate—probably one of the safest. Nearly one-third (32.4%) said they wouldn’t participate in any.

Nearly three-in-10 (29.7%) indicated they would be participating in a modified form of trick-or-treating; 16.2% selected “picking pumpkins,” “carving pumpkins” and “small party”; 13.5% said they will be dressing in costume; 8.1% will be making Halloween treats; and only 2.7% indicated they will visit a haunted house.

Some responding readers shared creative ideas they have for celebrating Halloween in 2020. Those included:

  • Home is located among a ‘circle’ of homes (about 35) off a busy street. Neighbors with young children have organized a parade around the circle. Many homeowners will sit in their front yard to watch and have treats in a bowl near the street for the parade participants.
  • We are participating in a health department sanctioned Trunk or Treat. It will be my first time decorating our car for a Trunk or Treat. Our theme is Jurassic Park.
  • A group I belong to is hosting its annual scavenger hunt. This year the gathering area will be on an acreage where we can socially distance, with a bonfire and chili feed. Should be fun!
  • My kid seems to think we’re going to have a scavenger hunt for candy at our house with a few friends. We worry we’ll forget where we hid the candy and the dog will find it.
  • Movie marathon
  • Strap a piece of schedule 40 PVC to your handrail on your porch steps and have the trick-or-treaters put their bags/buckets at the end of it and shoot the treat down the pipe.
  • Our neighborhood is asking families to setup tables outside to hand out candy. Most everyone is going to decorate their tables and wear costumes. Should be fun!
  • I thought I would make kid size Halloween printed material face masks and give them out with a candy bar. We live in the country and only have a handful of children stop by if they even come this year.
  • Trying to find a safe way to distribute candy, thinking of a device to shuttle candy to trick-or-treaters like a PVC pipe or snow shovel.
  • We were discussing ways to hand out candy with our social distanced lunch the other day – sticks in yard, slide/chute, leaving a bowl and my favorite – tossing it from your front door to the kids on the sidewalk…hoping for a basket! 🙂
  • An annual community event has been canceled so our company is stepping in to host a Trunk or Treat for anyone interested.
  • Put a table out with Halloween treats rather than putting in bags.

Several readers who left comments said they didn’t anticipate having children show up to trick-or-treat this year. Others said something should be done for Halloween to give children some kind of “normalcy” in this unusual year. Some readers are going to miss certain traditions, and one said, “I just can’t get into the mood for our normal Halloween traditions.” Editor’s Choice goes to the reader who said: “Everything about 2020 is scary. Hurricanes, COVID, killer wasps, etc. Shouldn’t take too much effort to be scary this year.”

A big thank you to all who participated in our survey!

Verbatim

You missed the MOST important Halloween tradition: SCARY MOVIES! 31 days of gasps, jumps, screams, and a couple of giggles because it doesn’t matter how many times I’ve seen a movie, I still jump like it’s the first time.

Thought about sitting in the driveway with a bucket of candy, but all the neighbors I talked to said their kids would be staying home. So, I guess it’s another night reading a book on the couch! At least the dog’s happy!

Really scary? I’ll check out stats on COVID and the election.

We rarely get trick-or-treaters in my neighborhood and expect none this year, so it will be business as usual: making a spooky-themed dinner and dessert and watching scary movies! I guess the upside is that we won’t have a bunch of Halloween candy laying around the house (there’s no office to take the leftovers to this year, boo!).

I just can’t get into the mood for our normal Halloween traditions.

We’ll have the candy ready for the trick or treaters for those who will venture out. If they’re willing to go, they should get at least some candy. I have not heard if our neighborhood is doing anything differently.

Due to a few bad apples/actors, the creative fun was lost a long time ago.

Not participating for the first time in my life.

I think the kids are safe outside and if people want to give out candy they should be able to IMO. It’s a great wrap up of summer for all.

Halloween will be different like everything in 2020. At least we will have a holiday, unlike Easter and Mother’s Day shortly after the virus broke out.

I’ve noticed a lot more decorations out this year. I prefer driving around looking at those. Begging people for candy that will end up in the trash isn’t my jam.

My kids are older now, but if I had younger kids I would invite a few of their friends over for a party, decorate the house, lots of food and snacks, that sort of thing.

Be safe and watch out for little ones.

We’re going to trick-or-treat and hand out candy, just like any other year.

I think there should still be events for kids. People can take precautions and still allow kids some kind of normalcy.

Everything about 2020 is scary. Hurricanes, COVID, killer wasps, etc. Shouldn’t take too much effort to be scary this year.

I have decorated my house, but Halloween is kind of a non-event around here. Not many kids

The desire for “normalcy” and socialization appears to be the driving force to maintain the holiday. The kiddies need a break from virtual life.

My community has opted to allow trick-or-treating with the usual safety precautions. Talk about a contact-tracing nightmare!

Just like everything else this year, I think the importance of it pales in comparison to the effects of the pandemic and the deaths it has caused. If we all want to have and return to normalcy soon, I believe that everyone needs to rethink their priorities.

Officially, I believe children are still allowed to trick or treat through neighborhoods. However, we do not anticipate many at our house.

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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