Pension risk management is a long-term proposition

McDonagh

By Keith McDonagh
Head of the Institutional Solutions businesses for Massachusetts Mutual Life Insurance Co. (MassMutual).
Posted on May 31, 2021

No matter how you view it, the management of defined benefit (DB) pension risks is a long-term proposition. A DB plan is a commitment with promises that need to be kept for decades. Pension managers must make decisions about the investment of millions and even billions of dollars with the knowledge that the money will provide security for retirees 10, 20, even 50 years into the future.

As employers that sponsor DB plans face fast-changing economic and financial realities, they are increasingly looking for new and better ways to manage long-term pension risks and obligations. Given volatile equity markets and the overwhelming popularity of defined contribution plans as the retirement plan-of-choice, firms are beginning to look for alternatives to managing DB obligations.

One increasingly popular method for managing pension risks is the transfer of pension liabilities to professional risk managers such as life insurance companies. Pension risk transfer (PRT) has become more popular during the past few years as companies strive to reduce their financial risks and focus more on managing their business enterprises.

While the pandemic hampered pension risk transfer sales in the first half of 2020, activity significantly strengthened in the second half of the year according to The LIMRA Secure Retirement Institute Group Annuity Risk Transfer (GART) Summary Report for the fourth quarter covering eighteen firms. In the last quarter of 2020, single-premium buy-out sales momentum increased roughly threefold from the previous quarter to $13.7 billion per the report. When comparing the fourth quarter of 2020 to the previous year, LIMRA noted that this represents a 21.3 percent increase. Moreover, this period’s sales activity ranks as the second highest since the fourth quarter of 2012.1

While the pandemic unfortunately has reminded us all how unpredictable mortality is, generally, we expect longer life spans and extended years in retirement, thus extending pension obligations. Management of pension risks is inherently a long-term proposition and best undertaken by professionals, who routinely evaluate, price, manage and meet promises that need to be kept for decades. Simply put, experience counts.

With an eye towards managing mortality risks that often stretch a half century or more, life insurers are best positioned to manage long-term obligations such as pension payments. The more PRT and pension experience a life insurer has, the better.

When selecting an insurer, confidence that pension obligations will be satisfied for the long-term is only part of the equation. It’s also important that plan participants be served with the same level of quality and care to which they are accustomed at their current pension plan provider, or better.

At MassMutual, we offer plan sponsors and intermediaries confidence in helping ensure their fiduciary duties and pension obligations are satisfied and annuitants will be served with care. As a mutual company run for the benefit of its participating policyholders, we offer confidence through our enduring financial strength, our annuity solutions expertise, and our passion for helping people secure their future and protect the ones they love.

If you’d like to learn more about MassMutual’s pension risk transfer capabilities, please conatct us or talk to your pension consultant.

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Keith McDonagh is Head of the Institutional Solutions businesses for Massachusetts Mutual Life Insurance Co. (MassMutual), which includes Institutional Insurance, Institutional Longevity, Defined Benefit, Institutional Investments, Stable Value, Medium Term Notes and Guaranteed Investment Contracts.

This article was originally posted in October 2018. It has been updated.

1 LIMRA International, “Secure Retirement Institute, Group Annuity Risk Transfer Survey,” Fourth Quarter 2020.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.