As Corporations Leave Pensions Behind, Life Insurers Tap Pension Risk Transfers

U.S. life insurers are increasingly tapping into pension risk-transfers to help companies in the United States and abroad manage their mounting financial obligations to retirees and future retirees in their defined-benefit pension plans.

Pension plan sponsors are exploring options to manage their liabilities and protect their balance sheets in the face of stock market volatility, declining interest rates, regulatory and accounting changes and longer life spans.

Insurers are positioned to help defined-benefit pension plans given expertise that can be leveraged in underwriting and pooling of risks, investment management and asset/liability management, said Richard Taube, vice president of institutional and structured products for Pacific Life. Insurers benefit from "a natural hedge to life insurance businesses," Taube said in an email. Revenue is generated through fee-for-service programs or through premiums received on insured approaches.

The Pension Benefit Guaranty Corp. insures pension benefits of private pension plans covering about 44 million of America's workers and retirees. Due to plan failures, the agency is responsible for the retirement benefits of about 1.5 million and its liabilities for these totaled $107 billion. The PBGC posted an increase in its 2011 deficit to $26 billion at year end, a $3 billion jump from $23 billion reported in 2010—the largest deficit in its history.

Recently, several companies are pondering options in the face of under-funded pension plans, including Hostess, Kodak and American Airlines.

Pension risk-transfer programs insurers offer or are involved in include pension buy-outs/close-outs that generally involve the use of group annuities; pension buy-ins, partial risk-transfers, reinsurance transactions and longevity insurance.

Principal Financial Group, in the U.S. pension buy-out market for 70 years, has issued 5,000 contracts covering more than 300,000 individuals, said Joe McCarty, Principal's vice president of annuity operations.

A buy-out involves a group annuity contract between Principal and the plan sponsor or plan fiduciaries in which they tell Principal what that benefit may be, he said. The employer pays Principal a single, one-time premium in exchange for promising to pay those benefits, he said, noting the liability is permanently transferred to Principal. Principal invests that premium in its $60 billion-plus general account. In return, Principal makes those payments each month.

MetLife offers pension risk management solutions in the United States, United Kingdom and the Republic of Ireland, said Robin Lenna, executive vice president, corporate benefit funding for MetLife, in an email. MetLife generates revenue from selling pension-risk transfer solutions from the premiums and fees the plan sponsor pays, Lenna said.

In 2010, LIMRA estimates U.S. sales in the pension risk-transfer market reached $1.7 billion, said Matthew Drinkwater, LIMRA's associate managing director of retirement research. When compared to the United Kingdom, where the pension risk-transfer market is "more advanced," sales in 2010 were nearly US $13.4 billion, he said.