Plan sponsors globally are accelerating their plans to manage their pension risk and eventually transfer it to outside parties, according to a new report by Mercer in the United Kingdom. Many countries have large pension obligations and plan sponsors have suffered because of low interest rates, volatile equity markets and rising life expectancies, all of which have been made worse by the economic downturn.
This has increased pension deficits significantly in many markets and made it difficult for chief financial officers to deal with increasingly unwanted pension distractions.
Mercer's data for the past five years show a significant increase in the size of bulk annuity and longevity swap deals. Since 2007, nearly 100 bulk annuity and longevity swap deals were made in the UK, totaling more than £33 billion.
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The news earlier this month of General Motors Co.'s intended discharge of around $26 billion of defined benefit pension liabilities to individual plan members and The Prudential Insurance Company of America is the latest in a series of high-profile companies proactively managing their pension obligations in the U.S. and Europe.
The trend is no surprise to Mercer's Global Head of DB Risk and Senior Partner Frank Oldham: "The market for transferring pension risk away from plan sponsors has developed significantly in the UK in recent years with the number, size and sophistication of these deals all moving on in leaps and bounds. Other European countries, particularly the Netherlands and Ireland, are also starting to see more activity and interest in this area and so it was therefore just a matter of time before these developments transferred to a latent U.S. market."
David Ellis, Mercer's Head of Insurance-based De-Risking in the UK, commented on what is currently a key difference between the UK and U.S. markets for transferring pension obligations: "UK plans have trustees that are independently charged with securing plan benefits and therefore transferring pension obligations to a third-party such as an insurer can be a desirable option. Many U.S. plan sponsors have been hampered by their fear that the equity and debt markets might react adversely to this type of action. The initial market reaction to the General Motors announcement demonstrates that this has not been the case and so opens the door for further action."
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