No decline in appetite for transferring corporate pension risk

The fourth quarter of 2018 saw continued momentum in the pension risk transfer market, as another $10.4 billion in corporate pension obligations was moved off sponsors’ books to insurance companies, according LIMRA Secure Retirement Institute’s quarterly U.S. Group Annuity Risk Transfer Survey.

The fourth quarter tends to be the most active for risk transfer deals, according to LIMRA. The $10.4 billion in sales was the third most active quarter on record, behind the $11.1 billion sold in the Q4 2017, and the blockbuster Q4 of 2012, which saw $34.6 billion in sales.

Last year’s second quarter saw $8.2 billion in pension transfer sales, the largest Q2 activity on record.

In 2018, total single premiums sales were $27.3 billion, which includes a nearly $1 billion buy-in deal, a type of risk transfer that is novel for the U.S. market. Total U.S. corporate pension obligations are about $3.1 trillion. By the end of 2018, about $135.5 billion in pension obligations have transferred to insurance companies.

Last May, FedEx announced a $6 billion deal with MetLife, moving obligations to about 41,000 retirees and their beneficiaries to the insurer. That was the largest deal since two blockbuster deals in 2012, when GM transferred a record $25.1 billion in obligations to Prudential, and Verizon transferred $7.5 billion to Prudential.

In December, Bristol-Myers Squibb transferred $3.8 billion in a full termination of its pension plan to Athene.

Lockheed Martin shed about $2.5 billion in liabilities in a deal with Prudential and Athene last year, and International Paper transferred $1.6 billion to Prudential in 2018.

Mid-to-large size deals drove the pension risk transfer market last year, according to LIMRA.

All told, 16 insurers provide data on sales to LIMRA. Two insurers entered the risk transfer market in 2018, another indication of corporate pension sponsors’ growing appetite to move pension obligations off their books, and growing competition among insures to assume the risks.

Risk transfer options have increased as the aggregate funded status of corporate pensions has improved since the financial crisis. According to the Milliman 100 Pension Funding Index, the aggregate funded status of the largest 100 plans was 89.9 percent at the end of 2018. Russell Investments put the aggregate funded ratio of the largest 20 U.S. plans at 85.3 percent.

By some accounts, momentum in the risk transfer market is far from slowing. Improved funded ratios, uncertainty in equity markets, the potential for rising interest rates, and high premium requirements to the Pension Benefit Guaranty Corp. will continue to drive sponsor demand.

According to MetLife’s 2019 Pension Risk Transfer Poll, which surveyed 102 sponsors, 76 percent of plans hope to completely de-risk their obligations, including 34 percent that said they intend to do so within the next five years.

“If market dynamics continue their current course, it is expected that a significant portion of the over $3 trillion of DB plan liabilities that have not yet been de-risked will flow through the pension risk transfer pipeline over the next decade,” MetLife’s report said.