Pension risk management is a long-term proposition


By Keith McDonagh
Head of the Institutional Solutions businesses for Massachusetts Mutual Life Insurance Co. (MassMutual).
Posted on Oct 8, 2018

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. With the rise of 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.

The LIMRA Secure Retirement Institute reports that single premium pension buy-out product sales surpassed $8.2 billion in the second quarter 2018, more than doubling the sales totals in the second quarter 2017.1 Year-to-date, buy-out sales were $9.6 billion, 76 percent higher than prior year, LIMRA reported .

But even when transferring pension risks, sponsors of DB plans need to maintain a long-term view. While PRT may be a highly effective tactic for plan sponsors to reduce risk and transfer, it’s possible to increase pension costs and risks if a PRT is not executed with long-term goals in mind.

MassMutual, through a discussion of these issues in a recently published white paper, “Pension Risk Transfer: Insights from an institutional risk manager about how to successfully de-risk and transfer pension obligations," provides an “insider” view of a successful PRT through the eyes of a professional risk manager.2 Understanding how life insurers evaluate and manage different risks may be helpful for employers who are considering a PRT or other options in managing their pension obligations.

With longer life spans and extended years in retirement, pension obligations are extending. 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. 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.

Whether a plan sponsor decides to transfer its pension obligations or maintain its pension plan for the foreseeable future, a long-term outlook is important.


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.


1 LIMRA International, “Secure Retirement Institute, Group Annuity Risk Transfer Survey,” Second Quarter 2018.

2 MassMutual, “Pension Risk Transfer, Insights from an institutional risk manager about how to successfully de-risk and transfer pension obligations,” September 2018.

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.