Understanding PRT: Retiring Your Pension Plan

Whether transferring corporate defined benefit pension plans to insurers, de-risking a plan portfolio, or otherwise altering a retirement program’s makeup, navigating the different options can be a challenge for sponsors.

A panel from Principal Financial Group described the paths that plan sponsors can take. The discussion, part of our “Understanding PRT” virtual conference, came amid a backdrop of improved funded ratios for company DB plans—although the panelists admitted that 2022’s turbulent markets may diminish that achievement somewhat.

The average funded status of the largest U.S. corporate DB plans rose in 2021 to its highest level in 14 years, owing to robust investment returns and rising interest rates.

Moderated by Joe McCarty, a vice president who leads Principal’s Retirement and Income Solutions unit, the panel delivered an array of insights for sponsors looking to do a pension risk transfer, or PRT, to an insurer or perform other alternations in their DB programs. The panel, which Principal sponsored, was put on by Chief Investment Officer, PLANSPONSOR, and PLANADVISER. McCarty described how Principal offers pension risk transfers, actuarial advice and DB services.

Altering a pension involves a “tapestry of different options” and involves “a lot of players,” noted Mike Clark, a senior actuary. With so many parties involved, a “high level of friction” might occur sometimes, he warned. Another risk is that, during plan transitions, there can be “slow reaction times to market changes,” he said.

Clark sketched out the varying scenarios confronting plan sponsors, such as how underfunded plans might be more oriented toward seeking higher returns and how asset allocations can change along the “glidepath,” namely the journey toward a better funded status.

One alternative for plans is to pay beneficiaries lump sums, which removes them from the pool. Clark speculated that these payouts might increase as interest rates rise. He pointed out that liability-driven investment strategies, known as LDI, do indeed lower risk. But as LDI usually involves shifting into bonds from stocks, that can sacrifice returns, he said.

“You need to understand all the considerations,” said Principal senior actuary Sumit Kundu—for instance, some sponsors on a de-risking path “might go back to equities to get extra alpha.”

Principal offers clients a tool to track their funded status, Kundu said, such as how a portfolio is doing versus a benchmark and what sponsor contributions might be needed. It also gives clients glimpses into possible future issues, which he called “what if” circumstances—such as “what if interest rates go up.”

One path when doing a PRT, said Principal senior actuary Tim Lewis, might be to transfer various parts of a pension program to multiple insurers. For instance, sponsors could choose “a smaller one as a way to get started,” he advised. “You can end one of several plans instead of all at once.”

Above all, he said, sponsors “need to be strategic about what is left behind.” When pursuing LDI, he went on, “also think about the annuity down the line,” when the PRT happens.

Amanda Wilson, Principal’s head of US institutional sales and relationship management, suggested that sponsors reassess their investment position, how their LDI portfolios are constructed, and how to execute changes. Several “key variables” are in play, she said, such as the size of a plan, its status (open, closed, frozen), and the industry it is in. Also, she counseled, “refresh your glidepath” as things change.

While fixed income is traditionally matched with liabilities as they come due, she suggested introducing some other assets not as liquid as bonds. “Try private placements,” she said. In transferring pensions, Wilson said, some insurers may want illiquid assets, as they promise better growth.

Coordination with other parties in a PRT is “crucial,” she said. After all, if sponsors and these others are misaligned, they risk encountering what she called “negative governance alpha.” In other words, “you can’t get done what you want to get done.”