A majority of plan sponsors have increasingly shown interest in a pension risk transfer transaction, according to a study by LIMRA Secure Retirement Institute.
The study found that eight in 10 private-sector defined benefit plan (DB) sponsors -- who also offer a defined contribution plan -- are interested in a pension risk transfer transaction. Four in 10 plan sponsors said they are “very” interested in a transaction, marking a 12 percentage-point increase from 2014, Limra said.
Limra SRI noted that there also has been increased interest in sales of pension risk transfers. The SRI’s pension risk transfer sales survey showed single premium buy-out sales (a product that allows an employer to transfer all or a portion of its pension liability to an insurer) have surpassed $1 billion for the past 18 quarters. Growth has predominantly been driven by small to mid-sized deals, Limra said, noting that the number of contracts sold has increased 76% from 2014 to 2018.
In addition, the study showed that half of all plan sponsors with frozen DB plans are “very” interested in pension risk transfer products. And among companies with active DB plans, 39 percent are “very” interested in pension risk transfer (PRT) products.
Forty-six percent of employers with both a DB and defined contribution plan have frozen their pension plans, the study found. Limra explained that a plan freeze may occur in order to cut costs and enhance competiveness, or mitigate the volatility of their funding obligations due to fluctuating equity markets, participant longevity, plan assets amounts and interest rates. Freezing a plan is one of the first actions plan sponsors take before purchasing an annuity from a private-sector insurer and entering into a PRT deal, Limra noted.
Those not interested in PRT products indicate that they already address their pension risks through alternative means (42%). Thirty percent said they don’t know enough about PRT products. And another 30% cite the high cost of purchasing an annuity as a reason they’re not interested in PRT products.
For those plan sponsors not interested in PRT products, 42% say it is because they already address their pension risks through alternative means. Three in 10 say they don’t know enough about PRT products. Another three in 10 cite the high cost of purchasing an annuity as a reason they’re not interested in PRT products, which may be a flawed perception.
Market conditions and regulatory changes, Limra said, have made it increasingly difficult for employers to offer DB pension plans over the past few decades. And those who maintain DB plans have run up against major obstacles such as sustained low interest rates, market volatility, increased longevity of plan participants, and rising Pension Benefit Guaranty Corp (PBGC) premiums.