Robust Pension Risk Transfer Activity Predicted This Year

NEW YORK – As it becomes increasingly difficult for companies to manage pension liabilities in the current market and regulatory environment, it appears that defined benefit (DB) plan sponsors’ interest in pension risk transfer (PRT) is heating up.  MetLife’s new 2017 Pension Risk Transfer Poll, released today, found that nearly nine in ten plan sponsors (87%) believe the level of 2017 PRT activity will be at least as, or even more, robust than 2016.  This insight may come from their own intentions—six in 10 plan sponsors (61%) surveyed have taken preparatory steps for an eventual PRT transaction, up from 45% in 2015, according to the Poll. The full report examining these findings is available at: www.metlife.com/prtpoll2017.

The Poll found over half of plan sponsors (57%) say they will use an annuity buyout to de-risk, including 43% who plan to use a combination of a lump sum and an annuity buyout.  An annuity buyout allows companies to transfer pension liabilities from their balance sheets to an insurer, while at the same time ensuring that pension benefits for current and future retirees – and their beneficiaries – are properly protected.

“Plan sponsors are showing growing interest in PRT transactions and are looking to move sooner rather than later,” says Wayne Daniel, senior vice president and head of U.S. Pensions at MetLife.  “The Poll found that among those sponsors that plan on using an annuity buyout on its own or with a lump sum, over three-quarters (77%) say they are likely to consider doing so within the next two years.  This is consistent with the robust level of activity MetLife is seeing in its own PRT pipeline.”

 

Plan Sponsors Preparing for Action

Among those plan sponsors likely to engage in a pension risk transfer within the next two years, the percentage that has already taken preparatory steps rises to 79%, according to the Poll.  The most common preparatory steps reported by all plan sponsors include an evaluation of the financial impact of a pension risk transfer (71%); discussions with key stakeholders (67%); data review/cleanup (64%); and, exploration of the PRT solutions available on the marketplace (59%), among others.

 

As was seen in 2015, the Poll shows the top catalyst for pension risk transfer remains Pension Benefit Guaranty Corporation (PBGC) actions (premium increases and/or changes in the premium methodology to the risk-based formula), with 64% of plan sponsors citing the agency’s actions as a driver.  Other primary catalysts include interest rates (50%) and the impact of changes to mortality tables proposed by the U.S. Internal Revenue Service in 2016 for use starting in plan years on or after January 1, 2018 (34%).

 

Role of Insurers in PRT

When selecting an insurer for an annuity buyout transaction, the Poll found nearly half of plan sponsors (47%) report that financial strength is the most important consideration.  A majority of plan sponsors (85%) are aware that insurance companies, rather than pension plan sponsors, are required by regulation to overfund their liabilities and hold an additional layer of capital.

 

“While plan sponsors recognize that insurance companies’ core business is risk management, there are some areas where plan sponsors may need additional education,” notes Daniel.  “According to the Poll, only 61% of plan sponsors are aware that a risk transfer to an insurance company does not represent a risk transfer to plan participants in any way.  It is critical that sponsors understand that the only thing that changes for the participant (or beneficiary) in these transactions is the entity from which payments are sent.”

 

Trends in PRT

While there is a growing awareness of emerging trends in PRT, including split deals and assets-in-kind (AIK) transactions, the Poll shows they have not necessarily gained traction at this point.  Over two-thirds of plan sponsors (69%) are aware that it is possible to split an annuity buyout transaction with two or more insurers.  However, today, only one in five (21%) say that they would be likely to split a PRT transaction, with the largest plans being the most likely to contract with two or more insurers.  Forty-four percent of plan sponsors say they would be unlikely to split the transaction, primarily for reasons of perceived complexity—they believe it would cause additional administrative burden.  Smaller transaction size was another reason cited.

 

While the ability to transact in AIK is relatively new to the U.S., plan sponsors appear open to it, with more than half of plan sponsors (51%) saying they would be more likely to select an insurer that allows the premium for the annuity to be paid with AIK rather than one that requires an all cash transaction.

 

About the Poll

The MetLife 2017 Pension Risk Transfer Poll was fielded between March 30, 2017-May 8, 2017.  MetLife commissioned MMR Research Associates, Inc. to conduct the online survey in cooperation with Strategic Insight, which owns PLANSPONSOR and CIO magazines.  There were 129 defined benefit (DB) plan sponsors who participated in the survey, including nearly six in ten (59%) who reported DB plan assets of $500 million or more.

 

About MetLife

MetLife, Inc. (NYSE: MET), through its subsidiaries and affiliates (“MetLife”), is one of the world’s leading financial services companies, providing insurance, annuities, employee benefits and asset management to help its individual and institutional customers navigate their changing world. Founded in 1868, MetLife has operations in more than 40 countries and holds leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East. For more information, visit www.metlife.com.