The business of managing big risks is large and important, especially in the world of defined benefit (DB) pensions.
Single premium pension risk transfer (PRT) annuity sales registered $8.2 billion the first six months of 2018, more than doubling sales for the same period a year ago, according to the LIMRA Secure Retirement Institute.1 It’s a fast start off last year’s robust $23.9 billion in sales, up 68 percent from the year before, LIMRA reports.2
While sales are growing, so are questions from employers that sponsor DB plans and who are rethinking how they should manage their pension obligations.
How should an employer evaluate its own pension plan to determine the right course of action? If a sponsor is committed to offering a pension benefit for the long term, what’s the best way to manage those obligations? What criteria should an employer use in evaluating the prospects of a pension being a candidate for a PRT?
Understanding how life insurers evaluate PRT can help DB plan sponsors successfully achieve their objectives. MassMutual’s recently published white paper, “ Pension Risk Transfer: Insights from an institutional risk manager about how to successfully de-risk and transfer pension obligations ," outlines how life insurers evaluate PRT in terms of long-term risks and price them accordingly. 3 But there are shorter-term considerations for plan sponsors as well.
Before pursuing a PRT, many companies first opt to better control their pension risks in the short term through administrative and investment strategies. Furthering the goal of risk management, some sponsors will then offer deferred participants a lump-sum buyout, eliminating the obligations and attendant risks associated with future payments.
Sponsors are encouraged to focus on their investment strategy, carefully matching payment liabilities with investment durations, sometimes reducing exposure to equities or reevaluating the mix of the investments within the portfolio.
On a macro level, time and timing can be of great importance. Opting for shorter-term solutions can sometimes be easier and less expensive to achieve. However, shorter-term solutions can also sometimes lead to longer-term problems.
Meanwhile, many sponsors remain committed to their plans and may simply want to consult about the best way to manage long-term obligations and maintain the health of the plan. The same rigorous thought process and evaluation employed for PRT applies to a sponsor’s evaluation of its relative risks associated with a pension that it intends to maintain indefinitely.
That’s why it makes sense for employers to determine their long-term goals before deciding on how to move forward. Risks should be evaluated in terms of long-term liabilities.
While shorter-term actions can effectively help manage risks associated with pensions, keeping long-term goals in mind is essential if those risks are to be mitigated.
Please see Neil Drzewiecki speak at the Pension Risk Transfer Conferences in Atlanta, Dallas, Chicago and New York City.
1 LIMRA International, Secure Retirement Institute, Group Annuity Risk Transfer Survey, 2nd Quarter, 2018,
2 LIMRA International, “Secure Retirement Institute, Group Annuity Risk Transfer Survey,” 4th Quarter, 2017.
3 Pension Risk Transfer, Insights from an institutional risk manager about how to successfully de-risk and transfer pension obligations.