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With Pension Risk Transfer industry sales reaching an all-time high at $48.3 billion in pension buy-outs in 20221, it’s clear: the trend to de-risk pension plans through a group annuity purchase is showing no signs of slowing down. Experience tells us plan sponsors spend rigorous hours fulfilling their fiduciary duties under the DOL Interpretive Bulletin 95-1 (IB 95-1) when selecting an insurer, and making sure the transaction goes well is a top priority. In this discussion, we’ll tackle how our customers source quality data that can bolster the PRT process and, ultimately, the final satisfaction of pension obligations.
Quality data drives transactional success and annuitant experiences.
Plan sponsors who are pursuing a PRT transaction have heard it time and time again… “transactional success is all about the data.” Not only can quality data aid in ascertaining an accurate premium quote, it can bolster the insurer’s ability to effectively administer the contract and its obligations for years to come. What’s more, MassMutual PRT systems are programmed based on the specifications of the contract and respond to each annuitant’s individual data to curate the experience across all touchpoints through the lifecycle of the annuitant.
Consequently, ascertaining quality data during the transition has many benefits and is key to a successful PRT transaction.
Knowing where and when to source the data can help, and it can vary at each step of the process: quoting, installation, and ongoing administration. To best understand the benefits of quality data, let’s review three key questions and the answers:
What’s the premium amount?
When asked for a quote, insurers will request certain data to help them understand the scope of the work and the value of the liabilities such as benefit amount, gender, date of birth, benefit form, etc. to aid in providing an accurate quote. Typically, the source of the data utilized at this juncture is from the recordkeeper and, generally, is the “rawest” form of data.
The data required during the pricing stage doesn’t need to be “perfect” as insurers perform premium true-ups later in the process and retain the right to adjust for material data discrepancies, if any. Nonetheless, striving for the most accurate data allows the plan sponsor to have the best comparison of insurer pricing on selection date and helps the insurers “sharpen their pencils” when estimating the premium. Note that many insurers evaluate data quality in their decision to participate in a transaction, so having the most complete data aids in having as many insurers participate as possible.
During the underwriting and pricing process, personally identifiable information (PII) is not necessary or appropriate, so data at this stage should not include name, address, or social security number (SSN). However, it is important to note that many insurers underwrite mortality based on location and employee profile, so state and/or zip code as well as hourly/salaried and union/non-union indicators are beneficial to have and may be requested.
As discussed in our white paper, Managing group annuity buyout costs and risks with Assets-In-Kind, plan sponsors may wish to cover all or a portion of the premium with plan assets. Should a plan sponsor be interested in this approach, the insurer will ask for a list of investment holdings.
Who’s covered?
After an insurer is selected, the installation process begins and it’s time to dig deeper. The selected insurer will request administrative and recordkeeping data, including PII, such as name, SSN, address, etc., for the covered group. Insurers are legally subject to Know Your Customer rules and this data drives the proper administration of the contract. For buy-outs, this data also drives annuitant interactions across all touchpoints as previously mentioned.
In our experience, the installation step for buy-outs also provides the best opportunity for the insurer to establish a relationship with the plan participants, set expectations on where annuitants can access their benefit in the future, and communicate payment continuity information as appropriate.
Given the current recordkeeper has been handling the benefits administration, payments, and participant interactions, generally they are the best source for this information.
How are obligations completely satisfied?
As you know, the ultimate objective of a PRT transaction is to ensure the satisfaction of the pension obligations - financially - through the group annuity contract and insurers need detailed information to properly administer the contract. For buy-outs, an insurer's ability to administratively satisfy the obligations is an additional point of consideration.
When administering a buy-out, insurers need different data for different groups of annuitants. For simplicity, let’s categorize covered annuitants into two buckets: those who are currently receiving benefit payments and those who are not.
For those who are currently receiving benefit payments, it’s essential to continue making benefit payments in the same way they are being paid from the pension plan to ensure a seamless experience. To do so, payment data is required such as bank name, bank address, routing and account number, tax withholding info, etc. This information is a great “fast follower” to insurer selection as it can help ensure timely payment continuity. Receiving this data early in the installment process allows the insurer to perform test runs to validate banking connectivity as well proper tax withholdings calculations.
Participants who are not currently receiving payments, typically referred to as “deferreds” as their payments are in a deferred status, bring a different lens into the data discussion. While the payment information isn’t available since they are not currently being paid, other data such as years of service, date of hire, date of termination, etc. is needed to value benefits and properly administer the contract. Having complete data for this group of annuitants solidifies the insurer’s ability to streamline the calculation of benefits and communicate this information to help annuitants who are looking to get a benefit estimate or commence their payments.
Generally, the information for the two groups is available from the recordkeeper or the plan trustee, and it’s best to keep all parties informed of the timeline of the transaction so they may best be prepared to provide the data in a timely fashion.
Summary
A pension plan is a generous benefit to covered employees and an important component of a retiree’s financial plan. After years of dedicated service from the employee and years of commitment from the plan sponsor to provide this benefit, providing quality data to the insurer will help achieve the ultimate goal of ensuring satisfaction of the pension obligations.
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