As America’s employers seek to de-risk their defined benefit pension plans, sales of single-premium pension buy-out products surpassed $4.7 billion in the second quarter of 2019, the 18th consecutive quarter of $1 billion in sales or more, according to the LIMRA Secure Retirement Institute (SRI) quarterly U.S. Group Annuity Risk Transfer Survey .1 Year-to-date sales were $9.5 billion, although down 2 percent from the first half of 2018, shows that the market remains robust.
The growing popularity of pension risk transfers (PRT) is good news both for employers that sponsor pensions and plan participants that depend upon pensions for retirement income. When a participant receives a notice in the mail that his or her pension has been transferred to a financially secure, experienced life insurer with great service, it’s good news.
That’s because life insurers are well suited to manage long-term financial risks such as guaranteeing a retirement income for life or providing worry-free service for years. And life insurers have deep experience creating products that are especially designed for such tasks. You can read more about how life insurers approach pension risk management in MassMutual’s latest white paper, Key Decisions for De-risking Your Pension Plan.
As the popularity of PRTs has accelerated, the use of annuities as a replacement for defined benefit (DB) pensions and as a vehicle to provide long-term financial security to retirees has flourished. However, some DB plan sponsors as well as participants are unfamiliar with the products, their suitability to provide a source of secure income in retirement, or the expertise, financial strength and capabilities of the providers of annuities: America’s life insurance companies.
The concept of relying upon an annuity for long-term income and security has roots in the ancient world. While annuities have become increasingly popular in the past few decades, the underlying principle dates back to the Roman Empire. The word, “annuity” comes from the Latin word, “annua,” which was defined as an annual stipend or payment. Roman soldiers, for example, were compensated for their service through annuities.
Although different forms of annuities have been introduced over time and continue to evolve today, the basic concept remains the same: a secure stream of income that is paid to an annuitant, typically for a fixed period or for life.
When consummating a PRT, pension sponsors typically purchase group annuities to provide retirement income for employees and eliminate risks, especially longevity risk. PRT annuities are designed to replicate the benefits available through a pension, removing an employer’s obligations to provide a guaranteed income, death benefits, inflation protection and others. While not every pension plan has all of these features, some examples include:
- Income for Life - Annuities issued by life insurers are the only product available that can guarantee an income for life. Like pension payments, income from an annuity lasts as long as the annuitant lives, ensuring a predicable source of income.
- Fixed benefit – Income from an annuity issued as part of a PRT is both fixed and guaranteed, meaning it will not vary due to fluctuations in the stock or bond markets. The life insurer guarantees the payments, which underscores the advantage of working with an insurer that has secured among the highest ratings from independent rating agencies for financial strength and stability.
- Inflation protection – In some instances, the income from an annuity can increase over time to help the annuitant keep up with inflation. However, inflation protection is not offered as part of all annuities and is a feature that must be purchased by the plan sponsor, typically when a defined benefit plan provides such benefits.
- Deferred Distributions – The annuitant can decide when to begin taking payments depending upon his or her plans for retirement. In some instances, the payments from an annuity will increase if the annuitant chooses to defer taking income past his or her full retirement age. Early retirement will typically reduce payments from an annuity.
- Death Benefits – When deciding to take income for retirement, annuitants typically have the option to select from several available death benefits that can provide income for a single life or pay a preselected death benefit to cover a spouse or significant other. Typical death benefits pay 100 percent, 75 percent or 50 percent of the initial annuity payment at the start of the annuitant’s retirement. The actual death benefit available from an annuity secured through a PRT can vary from plan to plan.
As a provider of annuities, life insurance, and other financial products, MassMutual focuses on solutions that help our customers secure their futures and protect the ones they love, including DB plan participants and PRT annuitants.
Recently, MassMutual enhanced its website to better serve PRT annuitants by improving navigation, providing more self-service features and information, and offering mobile access. Both retirees (who are receiving annuity payments) as well as deferred annuitants (those who have not yet elected to receive payments) can go to MassMutual’s website to access information about their annuity, as well as update their records.
Annuitants are able to view information about their annuity payments, tax withholding, tax reports, history and beneficiaries. In addition, annuitants can go to the site to enroll in direct deposit, access online forms and update their mailing address. The website is fully compatible with mobile devices.
While ancient providers of “annuas” couldn’t boast web portals, smartphone apps or even call centers, the concept behind annuities has largely remained the same for centuries: providing a secure stream of income that the recipient can count on for years and years.
1 LIMRA, “LIMRA Secure Retirement Institute: U.S. Single-Premium Pension Buy-Out Sales Surpass $4.7 Billion for the Second Consecutive Quarter,” Aug. 27, 2019.