The BCG Pension Insider

Plan sponsors, with help from their actuaries, have a certain expectation as to how long their participants will live, and thus can calculate the present value of the participants’ annuity payments. But future mortality improvements are very difficult to predict. If future mortality improvement is higher than the plan expects, participants may outlive these expectations, increasing pension costs for plan sponsors. The risk that mortality assumptions don’t match actual participant experience is known as Longevity Risk. There is a solution available in the market that can transfer this risk to an insurer called Longevity Risk Transfer (“LRT”).

With larger and more complex defined benefit (DB) plan terminations on the rise and continued growth in terminations in the U.S. pension risk transfer (PRT) market expected over the next decade, DB plan sponsors need to consider best practices for disposing their plan’s illiquid, alternative assets (e.g., private equity, real estate, hedge fund investments), if any, in the most cost-effective and timely manner.

Mike Mulcahy, Head of U.S. Life Reinsurance for Canada Life Re and President of CLRe’s U.S. Subsidiary, Canada Life Reinsurance Company, shared his thoughts on how the COVID-19 pandemic is impacting the pension risk transfer market, and identified some key considerations for pension de-risking.

Roughly 40% of all ERISA qualified defined benefit (DB) plans over $10M in assets are hard frozen, meaning there are no further benefit accruals. Many of these plans have been hard frozen for some time. In fact, 81% of hard frozen DB plans have been frozen for five years or more, and 54% have been frozen for 10 years or more. This paper raises two key questions for plan sponsors of hard frozen DB plans and identifies key considerations for plan sponsors whose DB plan has been frozen for an extended period of time.

David Lipovics, Vice President, U.S. Pension Risk Solutions, at the Global Financial Solutions Division of Reinsurance Group of America, Incorporated (“RGA”), shared his thoughts on recent key developments in the assessment of longevity risk and the impact on U.S. pension risk transfer transactions.

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 Providers. Notably, 17 of the 18 currently active PRT annuity providers participated in the survey.

BCG completed a total of 53 annuity placements in 2020, 42 plan terminations and 11 retiree annuity lift-outs totaling over $1 billion in annuity volume. The average selected annuity bid price / accounting PBO value was 101% for the 42 plan terminations and 94% for the 11 retiree annuity lift-outs. These percentages are not typos! This paper explores the current state of the U.S. pension risk transfer market, specifically as it relates to three factors that are currently contributing to exceptional annuity pricing.

As a defined benefit (DB) plan sponsor, it is imperative you work with advisors who are aligned with your objectives and understand your goals and time horizon. It is also imperative to work with advisors who understand the important role liability driven investing (LDI) plays when plan termination is the endgame objective. This paper explores the importance of employing a custom liability benchmark, aka “Custom LDI,” based on a plan’s liability, and how a customized LDI-PRT approach provides the most comprehensive solution.

A pension de-risking roadmap is intended to help defined benefit plan sponsors answer the question, “How do I get started down my plan’s de-risking path?”. The roadmap shown in this article captures steps that can be taken from a pension liability perspective and from a pension asset perspective. BCG often recommends that the first action any plan sponsor should take is to evaluate their DB plan’s expenses, i.e., “What are my plan’s holding costs?”.

Fidelity & Guaranty, Midland National, and Nationwide are the latest entrants to the U.S. PRT market. In terms of insurer participation, this article explores how the PRT market has evolved over the last 100 years - from 1921 to 2021! Both “historical PRT insurers” and “new entrant PRT insurers” are listed with discussion on how the changing insurer competitive landscape has impacted annuity pricing and market capacity.