Pension Plan Sponsors Not Reliant on ‘Traditional Asset Portfolio Diversification’

Pension plan sponsors are shifting away from a traditional asset and return-centric approach, according to Robin Lenna, executive vice president of corporate benefit funding at MetLife Inc. Plan sponsors don't want to rely on traditional asset portfolio diversification to meet their obligations, she noted. Lenna discussed this approach and other issues with Best's News Service.

Q: MetLife recently released its 2012 U.S. pension risk behavior index, which takes a look at plan sponsor attitudes and behaviors toward defined benefit pension plan risk management. According to this year’s study, the fourth annual, plan sponsors of the largest defined benefit plans continue to be most concerned about the underfunding of their plan’s liabilities and report that they are struggling to manage this risk well. What are some of the key findings on this report?

A: Over the past four years, this pension risk behavior index has chronicled plan sponsors’ shift away from a traditional asset and return-centric approach to managing their plans with a more balanced mind-set, looking at the liabilities at their pension plans as well as the asset side. What we’re seeing increasingly over time is that plan sponsors believe they can’t rely on traditional asset portfolio diversification to meet their obligations.

One of the key findings of this year’s study is that the value of the pension risk behavior index was the highest of the four years. This year’s index was 85 out of 100. The attention level of pension managers is increasing and with the increasing attention they’re focusing on what we think are the most important risks, and having an increased commitment to take a course of action to manage those risks. In the ’11 study, the top risk was two liability risks, actually the underfunding of the plan and the mismatch between the assets and liabilities. We’re also seeing that there’s an increasing focus on just a handful of risks and for those risks, they’re paying even greater attention.

Q: Let's touch on financial opportunities for life insurers such as MetLife in something called the pension risk transfer market. Can you tell me specifically what type of program MetLife mostly uses?

A: Well, there’s a whole suite of products there that we offer. We don’t really have a product-centric approach; we look at what the customer needs and try in a consultative way to understand the challenges pension plan managers have and tailor a solution. But in this suite of solutions there are a couple of types that I’ll just touch on. The traditional solution can be called a pension close-out or a pension buyout ...the first of this kind MetLife did in 1921 and this traditional solution is available in the U.S., the U.K. and the Republic of Ireland. What the traditional approach will do is transfer all the defined benefit liabilities to the insurance company and it’s usually done in connection with the formal plan termination and in the U.S. it satisfies the PBGC’s requirements for a voluntary plan termination and is accounted for a settlement.

Q: How does the group annuity work?

A: A group annuity contract provides a guarantee to plan participants and what they guarantee it will do is cover all future mortality, all pension plan expense, early retirement, market risk and investment risks for the planned participants. In exchange for that, the insurance company is paid a single lump-sum payment from the corporate plan sponsor.

Q: Talk about partial risk transfers.

A: What a partial risk transfer means is that a portion basically instead of doing all of the plan risks, the plan sponsor can select certain categories of risk to transfer. So some examples would be the benefit obligations of the current retirees, it could be their current terminated vested participants, it may also be to help transfer out early retirement risk that a plan may have, and so what it will do is they can transfer these risks without terminating their pension plan. And the plan sponsor benefits by reducing plan size, perhaps plan cost, some of the financial volatility that could be with their overall plan because they’ve made the amount of risk smaller.

Q: How long have these partial risk transfers been around? Are they only available by companies in the United States or abroad as well?

A: Well in our business, which is the U.S., U.K. and Ireland, they are available in all three markets and in the U.K. there’s been more active work around partials, but all of these types of transactions more so than in the U.S. So it’s a pretty common solution to use a partial risk transfer. A newer category of solution is annuity as a plan asset. And in the U.K. this is called a buy-in transaction. In fact, in the U.K., about half the transactions that were done in the past year were buy-in and half of them were buyout. So it’s actually becoming increasingly common. And what it does is it doesn’t cover mortality risk and what it does is sort of operates like a fixed income investment that becomes an asset of the plan.

Q: As a related matter, I know there are some reinsurance transactions also. Do you work with a lot of reinsurance companies on these transactions?

A: I think it’s always an option for an insurer to choose to reinsure some of its liabilities and it’s done across all segments of the insurance business — life insurance. It can be done at times in the pension space. We don’t necessarily on a regular basis reinsure but many reinsurers, like you mentioned, are active in the market.

Q: Can you tell me about some of the regulatory issues or rules facing employer plan sponsors of DB plans that life insurance companies also may be impacted by, perhaps in light of these various pension risk transfer programs?

A: The principal one would be the Pension Protection Act, or the PPA, that was enacted in 2006 and the provisions of this act are being phased in through 2012. For the PPA, its central requirement is for pension plan sponsors to maintain minimum funding levels under defined assumptions and that would be the big impact and I’d say that since we had all the market volatility the last couple of years this has been a real challenge for plan sponsors because what the PPA will do is that it will affect the expense of the pension, it will dictate for pension plan sponsors the timing and amount of future contributions they need to make as well as how they can price. And in light of all the market turmoil, it’s actually made it more challenging for some plan sponsors to be able to do transactions to reduce the risk of their pension plans.

Q: Can you comment at all on the Federal Reserve’s move failing MetLife on the stress test?

A: As you know, MetLife issued a press release on this topic, and I don’t have anything to add beyond what we’ve already communicated. My focus here at MetLife is on the defined benefit landscape and how it’s evolving to a greater awareness of the value of risk transfer and the opportunities in that area available to MetLife.

The entire interview with Lenna is available at http://www.ambest.com/media/MA.asp?lid=latestaudio&vid=lenna312

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])