From 1998 to 2002, Scott Cramer earned half a million dollars as a financial advisor supplying annuity and guaranteed income contracts (GIC) to pension fund managers of Taft Hartley union funds.
The president and founder of Maitland, Fla., financial advisory firm Cramer and Rauchegger, quoted, cold called and flew around the country making presentations to boards to drum up asset guarantee transaction business.
Earning .5 to 3 percent in annuity commissions and 10- to 20 basis points for $30 million to 40 million in GICs, pension managers relied on Cramer to do the leg work so that they didn't have to shop around for insurance carriers.
"I got the work because I had a good relationship with a manager of pension fund managers who was buying annuities for the fixed-income portion of his company's pension portfolio, but the problem is that pension managers often skip the financial advisor to go directly to insurers," Cramer told Financial Advisor magazine.
Another downside is that such labor intensive lucrative opportunities are often short lived.
"The pension fund manager transferred as much as he wanted to mitigate risk and when he was done with that, there was no more business to be had," said Cramer, who was unsuccessful finding other pension fund managers executing asset guarantee transactions. "It's a tough business to break into, but if such an opportunity fell into my lap again I'd do it in a heartbeat."
Asset guarantee transactions are similar to emerging risk-transfer strategy solutions, which financial executives are embarking upon in the U.S. In a buyout risk-transfer strategy, insurance companies take over some or all of a plan's obligations and fund them with annuities. With buy-in risk transfer strategies, the sponsor purchases annuities as assets of the plan.
"A buy-in risk-transfer solution is generally an option for companies who've already frozen their defined benefit plan," said Phil Waldeck, senior vice president of pension and structured solutions with Prudential Retirement. "A buyout is an irrevocable promise from an insurer that guarantees every participant is off the balance sheet of the plan sponsor."
The percentage of finance executives likely to freeze or terminate defined benefit plans over the next two years increased from 20% in 2010 to 31% in 2012, according to Prudential's Future of Retirement and Employee Benefits study.
"What's different is that risk-transfer solutions guarantee an insurer's assets will match the liability of a defined benefit plan, while asset guarantee transactions promise asset value," said Waldeck.
In May, Prudential Retirement completed a $75 million pension risk-transfer strategy for Hickory Springs Manufacturing Company in North Carolina, the nation's first ever pension buy-in transaction.
Pension risk-transfer solutions are expected to increase in coming years, opening a new source of revenue for financial advisors.
"Pension risk transfer solutions are increasing because so many pensions are underfunded or are being modified and terminated across the U.S.," said Kim O'Brien, president and CEO of the National Association for Fixed Annuities in Milwaukee. "The security and predictability of the guarantee that the annuity offers is in demand."
Funding levels are affected by longevity and volatility, according to Prudential.
"Because people are living longer and not getting returns in the stock market like they used to, many pensions have become underfunded," said Cramer whose firm manages $120 million in assets.
A 2012 Prudential and CFO Research Services study released in May found that while only 5% of CFOs have already implemented a defined-benefit risk transfer solution, 43% are likely to transfer defined-benefit plan risk to a third party insurer within two years in order to reduce or eliminate the effects of funded status volatility. That's up from 30% in 2010.
"For the financial advisor, it's about cross selling your existing relationship with plan sponsors but for an advisor who has no relationship with sponsors, it's a hard space to get into," Waldeck told Financial Advisor magazine. "It's a natural-product extension for financial advisors already working with existing sponsors of defined contribution plans that also sponsor defined benefit plans."Not every financial advisor is convinced that developing a risk-transfer strategy business is worth it because although getting in on risk-transfer strategy contracts could be a big pay day for a financial advisor, it's a niche market that has to be cultivated.
"To make it your focus is a difficult road to hoe because there's not that many defined benefit plans. They are being phased out. Once in awhile you'll come across a defined benefit plan that's lingering on a company's balance sheet, but it's rare," said Stephen Davis, president and registered principal of Safe Harbor Asset Management in New York.
About 45% of CFOs have talked to their boards about risk transfer as a solution to the rising costs of employee benefits and specifically health care, according to the study.
"Buy-in is better for the financial advisor, because it's more of an ongoing longer term commitment on an annual basis," said Davis, whose firm has $55 million in assets under management. "There's more business transitioning as a result of people meeting the criteria when they think of funding their retirement."
About 33% of respondents cited increased defined benefit funding levels as one of the factors that would be most likely to encourage their companies to transfer.
"Transferring risk is desirable as long as you have adequate resources but with interest rates where they are today, a company will have to come out of pocket for more money unless they are fully funded or overfunded," Davis said.