The BCG Pension Insider
February 2022 – Volume 124, Edition 1
Spotlight Series – Q&A with Athene
Pension Plan Funding Has Reached an Inflection Point – Considerations for Larger Plan Sponsors
|Headquarters||West Des Moines, IA|
|Assets Under Administration||$235.4 billion|
|Shareholders’ Equity||$20.1 billion|
* Athene USA is a subsidiary of Athene Holding Ltd. As of December 31, 2021
FSA, FIA, CFA, CAIA
Senior Vice President
Pension Group Annuity Leader
Richard leads Athene’s Pension Group Annuity business, overseeing solution development, transaction management, pricing and operations. He has substantial expertise in asset and liability management for defined benefit plans through several leadership roles at Mercer and Willis Towers Watson. His focus is on larger plan sponsors to develop creative financial and benefit solutions to meet their evolving objectives.
BCG: Can you provide an organizational update on Athene and tell us about Athene’s experience since entering the pension buyout business 4-5 years ago, including how your market share has grown so quickly?
McEvoy: Athene is a leading U.S. retirement services provider, with over a million policyholders, specializing in helping our customers retire comfortably and providing solutions to complex problems for individuals and institutions, including companies with pension plans. We are now the leader in U.S. pension group annuities, with a #1 market share in both 2020 and 2021. Since Athene’s entry into the U.S. pension risk transfer market in 2017, we have now successfully completed over 30 annuity placements totaling over $27B in group annuity sales.
Athene’s merger with Apollo in January 2022 was the culmination of a long and successful partnership since Athene’s founding in 2009. The combined Apollo aims to provide investors with excess return at all points across the risk spectrum, including the investment grade fixed-income replacement assets that make up most of Athene’s investments. These differentiated fixed-income assets have contributed significantly to our success, allowing Athene to provide compelling pricing for our clients, especially when yield is hard to find in public fixed income markets.
BCG: 2021 set a record for pension group annuity transactions with approx. $40B in volume. What does this portend for 2022 and beyond?
McEvoy: 2021 was indeed a record year with $35-40B in group annuity pension sales volume. But there are over $3 trillion of pension assets sitting on corporate balance sheets today. So, I think we’re still in the early stages of the development of this market. Not all of that $3 trillion market will move to insurers, but I do think we’ll look back several years from now and see it in the context of much greater annual group annuity pension sales volumes.
BCG: Why is now the right time for more large plan sponsors to take action to de-risk their pension plans?
McEvoy: While we’ve seen pension plan funding levels increase with equity markets, we have also just lived through substantial volatility, especially in the early days of the pandemic. Pension plans experienced material swings in funded status, and companies experienced related volatility in their pension financials and operating businesses. COVID-19 made companies aware of embedded pension risks, even those that appeared well funded. During the first quarter of 2020 the pension funded status of S&P 500 companies reduced 12% on average almost overnight.
So, what are some of the most persistent questions being asked of companies since all of this started: How is your industry going to transform? How is your company going to meet these completely unforeseen challenges and continue to thrive? How will you deal with the squeeze in labor and talent markets? More than ever, pension sponsoring companies need to be focusing their financial (and people) resources on their core businesses. And with enhanced pension plan funding levels, they are in a much better position to address their pension risk.
BCG: What do you see as the key trends driving the pension de-risking market over the next several years? What obstacles stand in the way of more large plans transacting?
McEvoy: While pension risk transfer emerged as a de-risking trend 10 years ago, the majority of PRT annuity transactions have been executed with a focus on administrative savings by executing transactions for smaller participant benefit amounts. Looking to 2022 and beyond, more companies are realizing that there is attractive pricing and market capacity for more comprehensive approaches. So, we are now seeing the focus shifting to purchasing annuities for larger segments of retirees and/or pursuing full risk transfer through plan termination especially given the material increase in fully funded plans.
To further enable larger transactions, Athene has been a pioneer with market leading solutions such as advance commitments and annuity buy-ins related to plan terminations to mitigate pricing risk. In many cases solutions need to be adapted to the sponsor’s specific needs. In the middle of 2020, for example, JCPenney declared bankruptcy. A once strong brand and company was forced to restructure, and many of the retirees were going to be forced to take benefit cuts. Fortunately, Athene and JCPenney were able to work closely together to find a path to keep all retirees’ benefits whole. It was a tremendous outcome, and indicative of how creative solutions can be a win-win for the plan sponsor, insurer and, most importantly, for plan participants.
In terms of obstacles, we have seen accounting impacts deter financial officers from executing these transactions, especially in the U.S. However, this has dissipated for many as plan sponsors have gradually reduced their return expectations, thereby limiting the income statement impact of transferring assets to an insurer. One-time “settlement” accounting impacts can also present a challenge, though a change to accounting rules that made this a non-operating expense has helped.
Another potential challenge is resourcing and specialization. While PRT transactions can cause resource management challenges for projects that span several months, retaining legacy pensions can consume material resources over a much longer timeframe.
BCG: Can insurers in the group annuity market support the potential wave of activity? Is there enough existing capital or will external sources be needed?
McEvoy: We believe the PRT market can support significantly larger volumes. The number of insurers writing PRT business has more than doubled in recent years with many of them having appetite to take on larger transactions.
Insurers have invested in their pension administration capabilities to support larger, more complex transactions, including by partnering with industry leaders in third-party administration. The success of this strategy is evidenced by Athene’s relationships with plan sponsors who return to Athene for a second and third transaction.
To further enable this growth, Athene will continue to lead innovative solutions to accommodate transactions that would not have been possible in previous years. In addition, to support capital needs, Athene currently has $7.4B deployable capital including undrawn capacity from the largest, dedicated strategic $3B sidecar funded by outside investors. Some peers have also raised smaller sidecars more recently.
BCG: How does the low interest rate environment impact the market, both from a plan sponsor’s and an insurer’s perspective? Will expected rate hikes help or hurt?
McEvoy: For many years, low rates and a perception that they might go higher was an impediment to liability or asset de-risking actions. Although legislative and regulatory relief in the U.S. has helped alleviate the burden of lower rates on pension plans by allowing sponsors to use higher liability discount rates, most plan sponsors have recognized the implications that a lower-for-longer rate environment has on their ability to generate sufficient returns to support their pension plan obligations.
As yields available in the public markets have declined, many insurers have also struggled to earn sufficient returns. In a persistent low-rate environment, experts that can generate differentiated investment-grade fixed income returns are best positioned to manage the assets supporting pensions and can provide attractive pricing to plan sponsors. On this front, Apollo and Athene have invested in differentiated direct-origination capabilities for fixed-income replacement assets that aim to earn incremental risk adjusted returns by capturing illiquidity premia appropriate for Athene’s long-dated, stable liabilities.
If interest rates were to rise (as they have in the year-to-date period), we think plan sponsors may be even more likely to purchase pension group annuities. Generally, some inflation and higher long rates increases funding levels and improve the pricing insurers can offer for pension group annuities.
BCG: In closing, what makes Athene different from other insurers?
McEvoy: Apollo and Athene are experts at managing retirement income, with over 500+ investment professionals and world-class infrastructure. We have tremendous asset management and asset sourcing capabilities to drive deal economics for our clients, and we approach our business with a focus on providing innovative solutions to complex problems.
We have been pioneers in what we see as the pension group annuity buyout 2.0 phase where larger and more complex deals are becoming more common now that the smaller cost management strategies have been deployed. Our combination with Apollo will strengthen our innovative capabilities to explore and provide asset management and insurance solutions to the growing number of clients reaching the pension endgame in the years ahead.
Contracts are issued by Athene Annuity and Life Company, West Des Moines, IA, in all states (except New York), and in D.C. and PR. For New York residents, contracts are issued by Athene Annuity & Life Assurance Company of New York, Pearl River, NY. Payment obligations and guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company. Products may not be available in all states.
ANNUITY PURCHASE RATES
Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)
Retirees (duration of 7) – 2.30%
Term Vesteds (duration of 10) – 2.44%
Actives (duration of 15) – 2.47%
Annuity Purchase Rates as of February 1, 2022