Pension risk transfer: Trends to watch beyond the headlines

The U.S. pension risk transfer (PRT) market is heating up.

Total transaction volume for 2021 is estimated to be between $38 and $40 billion, the biggest year on record. Yet even as we head towards what is likely a new annual record for the market, there are interesting trends beyond the headline that lend important insight.

Why PRT?

It is worth taking a step back to consider why a company would shift their pension liabilities to an insurer.

First, there are the known risks associated with the plan. Longevity resulting from pensioners who live beyond actuarial assessments, investments performing lower than anticipated, fluctuating interest rates, and the operational risk of administering the benefits to plan participants. Depending on the unique circumstances and financial situation a company faces, any of these risks could provide good justification to consider a PRT.

Second, as anyone that has led a business knows, sometimes priorities and strategy change. For example, if you run a pencil making company, your comparative advantage is making writing utensils – not investing or managing employee pensions. That’s where businesses such as insurers step in. Keeping with the example, the insurer would work with you to take on the responsibility for paying those employees’ guaranteed benefits, leaving the business to focus on what it does best. In other words, the goal of a risk transfer is to mitigate pension risk and work towards a more secure future for companies and their employees. It achieves multiple ends simultaneously: Secures the financial futures of plan participants and enables a business to focus on its core competency while removing financial and operational risk.

The macro picture

Now, let’s dig into some interesting new data.

According to LGRA research, healthcare/hospitals was the leading industry for PRT transactions since 2017. In fact, from 2017 through June 2021, healthcare/hospitals accounted for 14% by premium of all Requests for Proposals (RFPs) received by LGRA over that time. The aerospace/defense industry came in the next highest at 10.6%, followed closely by basic materials and industrial goods.

Zeroing in on healthcare

Healthcare/hospitals is the largest industry in the entire defined benefit market, representing 20% of all defined benefit plans out there. Hospitals and healthcare systems also have a high proportion of frozen plans, coming in second only behind the manufacturing sector. Plan freezes are usually the first step of the de-risking strategy. As such, it is likely that these entities have begun their de-risking journey earlier than most and are now at a later stage in their strategy.

The map below illustrates deals by premium that we received RFPs for since 2018. Note the geographical concentration of healthcare/hospital deals in the northeast.

This analysis is consistent with what we’re seeing in the broader defined benefit space. The bulk of healthcare and hospital defined benefit plans in the US reside in the northeast. Some 30% of healthcare DB plans are domiciled in the northeast alone.

It’s a similar story when you zoom out and look across all industries.

At 32%, the northeast has the highest concentration.

A recent industry shift

The beginning of last year looked different with hospital and healthcare transactions making up just 5% of PRT activity in the first half of the year. One of the main reasons for this shift is the JCPenney transaction, which transferred $2.8 billion of its pension obligations off its books, making the apparel industry lead with 33% of total market premium. It may also be that hospitals/healthcare kept their focus on combatting the pandemic relative to more peripheral matters of concern. A third possibility is that many small hospitals with lower pension obligations are pursuing PRT transactions as opposed to, say, a few conglomerate health care systems.

To be clear, deals like JCPenney’s aren’t the norm in our business, but such large transactions are indicative of growing appetite amongst employers to use PRT as a de-risking strategy. Risk transfers accelerating in other industries is positive for the PRT industry and is a sign of broadening demand for this important financial solution. We will be watching to see if this diversifying trend continues or if healthcare and hospitals transactions pick back up again.

For those of you that are looking to provide counsel to your pension clients, it may be worthwhile to see what industry peers are doing. If others in the industry are thinking about derisking or already on their derisking journey and your client isn’t, should they be?

George Palms is the president of Legal & General Retirement America, a business unit of Legal & General America, Urbana, MD. Retirement products are underwritten and issued by Banner Life Insurance Company, Urbana, MD and William Penn Life Insurance Company of New York, Valley Stream, NY. Banner products are distributed in 49 states, the District of Columbia and Puerto Rico. William Penn products are distributed exclusively in New York; Banner does not solicit business there. The Legal & General America companies are part of the worldwide Legal & General Group.