The BCG Pension Insider
June 2021 – Volume 116, Edition 1
Highlights from BCG’s 2021 Survey of Asset-In-Kind Practices of Annuity Providers
It is important for plan sponsors and their advisors to understand the practices of annuity providers related to asset-in-kind (AIK) transfer arrangements for pension risk transfer annuity buyouts, so that they can prepare the asset portfolio and optimally carry out the transaction. Here, we present some highlights from BCG’s 2021 Survey of Asset-In-Kind Practices of Annuity Providers1. Notably, 17 of the 18 currently active PRT annuity providers participated in the survey.
AIK practices have evolved quite a bit in recent years. AIK is now more commonly used in the U.S. PRT market than in prior years, and the COVID-19 market environment caused further changes to insurer AIK practices. While AIK was previously only a consideration for plans transacting above ~$100 million, we are now seeing AIK transfers happen for smaller transactions.
Highlights from BCG’s 2021 Asset-In-Kind Survey
|1. Has your company accepted an AIK transfer for an annuity buyout transaction?||Count (n=17)|
Ten of the 17 participating annuity providers have accepted an AIK transfer for an annuity buyout transaction.
|2. If Yes, how many AIK transactions has your company completed?||Count (n=10)|
|1 to 5 transactions||3|
|6 to 10 transactions||3|
Only four annuity providers have completed 11 or more AIK transactions
|3. Which asset classes have you actually accepted for an AIK transfer?||Count (n=10)|
|Investment Grade Corporate Bonds||9|
|Treasury Securities (including STRIPS)||8|
|High Yield Bonds||4|
|Private Placement Bonds||2|
|Derivatives (to be novated)||0|
|Unit-linked / Pooled Funds||0|
The 10 annuity providers who have completed an AIK transfer have primarily accepted traded fixed income assets for AIK transfers, with half accepting High Yield. Few insurers have accepted illiquid assets such as private equity and hedge funds. Just one insurer accepted public equity.
|4. What is the average discount or premium that you have recently offered on AIK transfers?||Count (n=13)2|
|Premium: More than 1.0%||0|
|Premium: 0.5% to 1.0%||0|
|Premium: 0.0% to 0.5%||1|
|Discount: 0.0% to -0.5%||3|
|Discount: -0.5% to -1.0%||4|
|Discount: -1.0% to -1.5%||1|
|Discount: -1.5% to -2.0%||0|
|Discount: more than -2.0%||0|
When compared to traditional all-cash transactions, nearly all of the responding annuity providers indicated AIK transfers either make no difference or can deliver savings, while one annuity provider indicated a slight premium.
|5. Is there a minimum asset amount before an AIK transfer is considered?||Count (n=13)2|
Five annuity providers responded that they do not have a minimum asset amount before an AIK transfer is considered. For the eight annuity providers that indicated a minimum asset amount, the lowest stated minimum was $50 million, but most annuity providers indicated flexibility on their stated minimum.
How Can BCG Help
- 1 See April 2021 BCG Pension Insider Newsletter Article – “Liability Driven Investing When Plan Termination is the “Endgame” Objective” for discussion on the four investment stages to plan termination, including the importance of implementing a custom LDI portfolio which not only forms the basis for investing the portfolio and performance measurement but is also suitable for a future AIK transfer to annuity providers.
- 2While 13 annuity providers responded to this question, only 10 of them have completed an AIK transaction.
ANNUITY PURCHASE RATES
Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)
Retirees (duration of 7) – 2.02%
Term Vesteds (duration of 10) – 2.30%
Actives (duration of 15) – 2.44%
Annuity Purchase Rates as of June 1, 2021