Pension risk transfer: Now might be the time to consider offloading the risk

Some of the country’s largest and most storied brands like Ford and Coca-Cola have long offered a pension plan—a benefit that historically helped maintain talent and reward employee loyalty with the promise of a steady stream of income lasting the length of the employee’s retirement. In fact, a recent survey by Athene uncovered that over one-third of Americans (36%) indicated that they are primarily dependent on employer-sponsored retirement plans to save for retirement. Yet the world of private-sector pensions has become increasingly smaller, with only 15% of private industry employees being offered a traditional pension plan in 2021, according to the Bureau of Labor Statistics.

Some may argue that today’s market and regulatory environment has made it too difficult for companies to manage their pension plan liabilities, but there is a “glass half full” solution. One of the biggest ways for companies to lighten their balance sheets while sustaining employee loyalty is by offloading pension risk via Pension Risk Transfer (PRT).

So, what are pension risk transfer solutions?

PRTs are insurance solutions that allow a company or plan sponsor to transfer some or all of the pension plan’s key risk to an insurer. The pension risk transfer process is governed by the Department of Labor and the Employee Retirement Income Security Act (ERISA). ERISA prevents a plan sponsor from structuring pension risk transfers in a manner that reduces pension benefits, ensuring retirees’ financial security.

In 2021, approximately 420 PRT cases representing around $30 billion of premium was replaced with insurers, according to LIMRA. This is largely because these solutions help satisfy all three parties involved – the plan sponsor, the insurer and, more importantly. the end-users (also known as pension plan participants), who can maintain peace of mind as they plan for their respective retirements.

In many scenarios, retirees are serviced by best-in-class dedicated annuity administrators who can leverage the expertise of their insurance company. To even be considered for a pension risk transfer, insurers must be well capitalized, highly rated, and pass a rigorous fiduciary review. Properly structured transfers are meant to improve the financial position of the plan participants, who in turn benefit from pensions fully funded with primarily investment-grade fixed income securities.

For companies looking to de-risk their pension liabilities and gain relief on their corporate balance sheets, PRTs are an increasingly attractive option. Dan Akerson, CEO of General Motors, captured the benefits of PRT solutions in 2013 when he said, “Thanks to a lot of hard work, I think we’re actually able to act like a car company again, not a medical insurance company or a pension fund attached to a car company.” PRTs provide companies greater flexibility to stabilize their businesses and do what they do best: reinvest in the business and focus on their core business, current employees, and future growth.

It’s also a symbiotic relationship for insurers as these transactions provide a growth opportunity for their partners, which in turn allows them [the insurer] to be better insurance providers for their respective policyowners.

For companies who meet—or are close to meeting—their pension obligations, now might be the time to consider a PRT deal as, for many, investment gains have helped them get close to fully funding their pension obligations. In fact, according to research from Milliman Inc., the 100 largest corporate pensions were funded at 106.3% at the start of July 2022. Without worrying about needing to fulfill pension obligations, business leaders can focus on driving growth by ensuring liquidity and investments for continued market volatility and rising interest rates. And, once employees are assured that their pension benefits will be preserved, companies have taken an additional step toward increased employee loyalty and motivation.

How to choose a PRT partner

It’s crucial for companies to find trusted, experienced partners who can tailor customized solutions for the best possible outcome for both the company and their pension plan participants. Working with a provider that has a proven track record for always paying, and the ability to continue to pay all required benefit amounts to participants, is critical.

Financial strength, expertise in managing retirement obligations, and prioritization of the pension plan participants are all elements needed for an insurer. When considering a PRT partner, look for an insurer whose top priority is policyholder protection and who understands the seriousness of this responsibility and are well-equipped to cater to the needs of retirees from a financial security standpoint.

PRT transactions are a modest solution that can assist in securing the fortunes of thousands of American workers while also providing value to companies by helping them weather the volatility to come.

Richard McEvoy is senior vice president and pension group annuity leader at Athene.