2024 Mid-Year U.S. Pension Risk Transfer Market Update

BCG Pension Risk Consultants I BCG Penbridge (“BCG”)

Headquarters	Boston
Year Founded	1983
No. of Annuity Placements	2,500+
Senior Team Avg. DB Experience	28 Years
Website	www.bcgpension.com

Steve leads the delivery of BCG services to plan sponsors and advisors from initial pension de-risking analysis to ongoing PRT consulting to full plan termination. Additionally, Steve is responsible for driving engagement with BCG’s plan advisor relationships, creating new channels for BCG’s services and developing new solutions and services that drive BCG’s growth. Steve has over 20 years of experience in the defined benefit plan industry.

¹ Steve authors or co-authors numerous articles, spotlight Q&A interviews and industry surveys on topics relevant to the pension de-risking industry, including the featured article each month in BCG's highly followed industry newsletter, The BCG Pension Insider. To subscribe, click here.

Q1: Provide a quick backdrop on 2023 transaction activities. What were the common challenges or obstacles faced during last year's transactions, and how were they addressed?

Keating: 2023 was another very active year for the U.S. pension risk transfer market. There was a total of 773 annuity placements in 2023, 453 plan terminations, 310 retiree liftouts and 10 annuity buy-ins. BCG completed 85 annuity placements in 2023, including 60 plan terminations and 25 retiree liftouts. This ranked #1 in the PRT market by number of transactions, totaling $1.3 billion in premium volume. PRT annuity placement pricing in 2023 also remained historically attractive. BCG’s average selected annuity bid price / accounting PBO value was 101.9% for the 60 plan terminations and 99.8% for the 25 retiree annuity lift-outs.

Regarding challenges or obstacles, plan administrator and insurer capacity (human capacity, not financial/capital) issues arose during 2023, leaving some plans unable to complete a plan termination on their desired timetable, and others not receiving the expected (insurer) interest, especially during Q4. As a result, Q1 and Q2 of 2024 were busier than usual, as plans that were unable to complete transactions at the end of 2023 worked to complete their plan terminations or retiree liftouts at the earliest opportunity in 2024. According to LIMRA, U.S. Pension Risk Transfer sales posted a record-high first quarter with PRT premium volume at $14.6 billion.

Q2: Can you share any specific success stories or case studies from last year's transactions that highlight best practices?

Keating: Insurer capacity toward the end of 2023 created interesting annuity purchase situations for a number of plan sponsors. This environment highlighted the need to maintain flexibility when it comes to annuity placements, and to work with an expert like BCG that is familiar with what the annuity price should be. Late in 2023, BCG had a few annuity placements scheduled to be completed, but the insurer capacity constraints caused there to be situations where there was less competition than usual. As a result, a few plan sponsors saw that the final quoted prices were noticeably higher than might normally be expected. For situations where this occurred as part of a plan termination, BCG had built sufficient flexibility into the calendars for these annuity placements, allowing them to back away from finalizing the placements in 2023. When these placements were revisited in the first month or two of 2024, the pricing (as anticipated) decreased by nearly 10% over the late 2023 quotes. The foresight to make sure there is sufficient time (e.g. in a plan termination schedule) to allow for such an approach, combined with the ability to recognize when insurer pricing is unfavorable, and the willingness to advise the plan sponsor to back away until the environment is better, all combined to lead to multiple, similar success stories that began in 2023 and wrapped up in early 2024.

Q3: What criteria do you use to select an insurance company for annuity placement?

Keating: Our due diligence and fiduciary services involve conducting the insurance company due diligence required by Department of Labor Interpretive Bulletin 95-1, including reviewing the administration capabilities of insurers and serving our clients in a fiduciary capacity as an independent expert. BCG’s ongoing evaluation of insurers via questionnaires, on-site visits and the experience of more than 2,500 annuity placements makes us uniquely qualified to assist plan fiduciaries with the due diligence process. On a separate but important note, we regularly hear from insurers that we provide thorough and well-organized bid specifications, as well as clean and complete data for their transactions. This helps to maximize the number of bidding insurers and ultimately to drive the lowest possible price in the annuity market which, as a firm, is critical to our value proposition.

Q4: What is your 2024 outlook on the PRT landscape? What advice would you give to pension plan sponsors considering a PRT event in the current year? Given that is it mid-year what headwinds could a plan sponsor face that is considering PRT?

Keating: Our current outlook on the PRT landscape remains bullish. The average defined benefit plan in the U.S. is now fully funded and at its highest funded ratio (assets/liabilities) since the financial crisis, over 105% in recent months. Many plans are also hard frozen (i.e. no longer accruing benefits) and have a high percentage of retiree participants whose liabilities are priced most attractively by PRT insurers. Our advice to plan sponsors right now is (1) Take earlier action for plan terminations and retiree lift-outs (2) Take advantage of favorable lump sum opportunities and (3) Continuous monitoring, ongoing PRT consulting is critical to achieve optimal results. The bottom line is - the time for action is now.

To help plan sponsors be prepared to act, BCG created and maintains the longest standing annuity pricing tracker (since January 2011) for the U.S. PRT market - The BCG PRT Index - in which 16 insurance carriers load their annuity pricing rates each month to help us understand how annuity pricing is trending in the market. This allows us to help set plan sponsor expectations on annuity pricing, compare annuity pricing to other important pension liability measures and to capture funded ratio or annuity pricing inflection points when they happen.

In terms of mid-year headwinds, much like 2023, we expect that in Q4 2024 there will be insurers that are capacity-constrained, leading to fewer insurers and potentially higher pricing. Add in the presidential election in November (and the extreme volatility in markets that has followed recent past elections), and the final two months of 2024 could be more volatile than plan sponsors would prefer. Plans that are targeting to complete a plan termination prior to the end of 2024 may consider the pros and cons of delaying the final annuity purchase into early 2025 to land in a more predictable market.

Q5: How can plan advisors get in touch or inquire with BCG about a particular plan or opportunity?

Keating: BCG enjoys great working relationships with plan advisors and has helped hundreds of advisor plan sponsor clients make informed decisions on their DB plan’s preferred de-risking strategy over the last 5 years. To inquire or get our perspective on a DB plan client or prospect, all we need from a plan advisor is the plan sponsor name or plan name and we will then be in touch with our “Initial Plan Assessment” or IPA for short. An IPA summarizes a DB plan’s current situation and provides BCG’s initial thoughts on potential de-risking strategies in an easy-to-understand format. Best of all, we aim to turn around IPAs in 48 hours or less after a request is received.

Q6: In closing, is there anything else you’d like to mention?

Keating: Yes, there is! Our singular focus at BCG is to help plan sponsors de-risk their defined benefit plan(s) in the most efficient way possible. We achieve our best outcomes when we deliver our upfront PRT Analysis (a one-time deliverable) and then get engaged for ongoing Customized Buyout Price Monitoring. CBPM improves on PRT Analysis and a plan’s liability driven investing strategy with a continuous PRT monitoring solution to identify and enact cost and risk saving transactions at opportune times. Plan sponsors who routinely monitor their plan’s funded status (e.g., monthly) are able to take advantage of attractive de-risking opportunities, while those that take a more laissez-faire approach to their plan’s de-risking strategy run the risk of missing out on the chance to save (literally) millions of dollars.

The bottom line - pension de-risking is continuing at a rapid pace in 2024, but a more strategic, consultative, fast-acting (prepare in advance) approach needs to be adopted by plan sponsors to successfully navigate market volatility, optimally reduce risk, achieve desired pricing and timing outcomes and save significant dollars.