The BCG Pension Insider
November 2022 – Volume 133, Edition 1
Spotlight Series – Q&A with Corebridge Financial
The Growing Use of Buy-ins to Secure the Path Toward Eventual Plan Termination
|Assets Under Management & Administration||$345 billion*|
* As of September 30, 2022
Ethan Bronsnick, CFA
Managing Director, Head of US Pension Risk Transfer
Ethan leads the US Pension Risk Transfer (PRT) business of Corebridge Financial (formerly AIG Life & Retirement).¹ Prior to this role he advised plan sponsors on de-risking pension obligations for Morgan Stanley and Mercer. Notably, Ethan helped to open the jumbo-case pension buyout market in 2012 and later advised on the largest-ever US plan termination.
¹ All products and services are written or provided by subsidiaries of Corebridge Financial, Inc.
BCG: Who is Corebridge Financial? What part of the US pension risk transfer market does Corebridge Financial focus and why?
Bronsnick: Corebridge Financial—formerly AIG Life & Retirement—makes it possible for more people to take action in their financial lives. With more than $345 billion in assets under management and administration as of September 30, 2022, Corebridge Financial is one of the largest providers of retirement solutions and insurance products in the United States.
In the US PRT market, we are particularly active in mid- to large-sized pension plan termination buyouts and pension buy-in transactions with deferred lives, especially if they have unique or complex benefit provisions. We also participate in more straightforward retiree-only transactions of various sizes.
We have participated in the PRT market for over 30 years and during that time we have helped the market evolve with client-centric solutions and product development innovations. We differentiate ourselves based on our underwriting expertise, risk management, attentiveness to clients during our proven on-boarding process, and exceptional pension benefit calculation and plan administration standards.
Our focus on plan terminations and complex client requirements matches the skills and experience of our team and our commitment to the long-term protection of annuitants.
BCG: You have been an active participant in the US PRT market on both the advisor and insurer side for almost 15 years. What surprises you most about where the market is today?
Bronsnick: The evolution of the pension risk transfer market has been remarkable—increasing tenfold from $3.8 billion in 2013 to $38.1 billion in 2021 based on LIMRA data.
One of the biggest surprises in the last several years has been the focus on small benefit retiree carve-outs rather than full plan terminations. Or, said slightly differently, the motivation for PRT has been more focused on cost savings (for example, PBGC premium and administration costs) rather than complete risk transfers for various reasons.
PRT is an opportunity to completely remove legacy pension obligations and while we have seen more larger full plan terminations the last couple of years, I would have expected that sooner and in higher volumes.
Now, though, there are more insurers, increased industry capacity, high funded status levels, a growing acceptance of the accounting implications, and a strong awareness of the benefits of PRT. With these in place, I suspect the market will continue its growth in the next decade with more focus on full plan terminations.
BCG: With pension plan funded status levels at decade-plus highs in 2022, how can plan sponsors best assess if now is the right time to pursue pension risk transfer?
Bronsnick: Pension risk transfer is always a complex decision since it requires input from multiple stakeholders within a plan sponsor organization. In my experience, the PRT decision works best when a plan sponsor has a clear and discrete set of objectives. These goals could include lowering the cash and/or accounting cost burden of a pension plan, de-risking the balance sheet and/or saving management’s time and effort in overseeing a pension plan.
The current high funded status levels make PRT more attractive in my view since less cash contribution is required to complete the transfer— and I would suspect in many cases right now it’s a zero cash contribution. Frozen plans are de facto legacy subsidiaries so unless there is a reason to retain the pension plan, pension risk transfer provides a sound and proven option to transfer the obligation in an economic and safe manner while protecting the interests of all parties.
BCG: We’ve seen an uptick in buy-in annuity purchases in the U.S. in the last two years, can you explain why?
Bronsnick: Buy-ins provide increased flexibility and—at the same time—an enhanced level of economic and capacity certainty. This can be a compelling value proposition for plan sponsors.
A buy-in group annuity contract is issued by the insurer to the pension plan in exchange for a premium payment and covers the benefit obligations of the plan. The contract is a plan asset and the insurer makes bulk benefit payments to the plan. The plan retains the administration responsibility and therefore makes the ultimate payments to the plan participants.
The flexibility comes in since a buy-in can be an interim solution that will convert to a buyout months or years later, whenever the sponsor makes the decision. It can also serve as a permanent solution for those plan sponsors wanting to retain a connection to the participants but still seeking to meaningfully de-risk the plan from a longevity and asset- liability risk perspective.
The increased activity in buy-in annuity purchases over the last two years has largely been driven by plans that want to lock in insurer capacity and pricing terms when they begin the 1- to 2-year full plan termination process—rather than waiting until the end of the termination process to purchase the annuities. This provides plan sponsors a way to better predict the required cash contribution (or the surplus amount) of a plan termination upfront rather than discovering that amount at the end of the process. In this way, buy-ins narrow the cone of variability associated with a plan termination—which makes management and boards more comfortable during the upfront approvals process.
BCG: You indicated buy-ins are most commonly used by plan sponsors as an interim solution? Can you elaborate further on the typical holding period for buy-in contracts and how the conversion to buyout works?
Bronsnick: To date, buy-ins have been more common as an interim solution for the reasons I mentioned related to the plan termination process and plan sponsors wanting more certainty sooner than was available in the past. The typical holding period has been 1-2 years, which matches the typical plan termination process timing.
Regarding the conversion process from buy-in to buyout, it involves three main components. The first is the straightforward legal process where the contract becomes a buyout instead of a buy-in once the sponsor elects to convert. The second is focused on administrative responsibilities with the insurer taking over administration just like they do on any buyout— except the conversion becomes simpler since the insurer is already familiar with the terminating plan and some data clean-up work is already complete.
The third element is an optional feature depending on how the buy-in was structured. The plan may offer a lump sum window to participants during the plan termination, which would require matching data changes in the buy-in contract to reflect the lump sum election results. This means the insurer may need to refund some premium so the plan can pay lump sums to participants or the plan might owe more premium if the aggregate amount of lump sums is lower than expected.
BCG: In closing, with extreme volatility now gripping the markets, how might PRT be a welcome relief to many CFOs at this moment?
Bronsnick: I think it’s important for CFOs to recognize the history of pension funding cycles. Plan funded status levels, on average, exceeded 100% prior to the tech bubble bursting in the early 2000s and prior to the financial crisis. Those events prompted significant funded status deterioration and cash contributions into corporate pension plans.Of course, what’s around the corner in the current market environment is uncertain, but we’re at a point where the average plan is overfunded again. The big difference today versus 2000 or 2007 is the existence of many well- tested options to de-risk including a vibrant PRT market. Management teams with a plan in place will likely benefit the most in turbulent times.
About BCG Pension Risk Consultants | BCG Penbridge (“BCG”)
BCG specializes in assisting defined benefit plan sponsors with managing the costs and risks associated with their pension plans. Since 1983, BCG has successfully helped over 2,500 organizations achieve their pension de-risking goals.
This material is general in nature, was developed for educational use only, and is not intended to provide financial, legal, fiduciary, accounting or tax advice, nor is it intended to make any recommendations. Applicable laws and regulations are complex and subject to change. Please consult with your financial professional regarding your situation. For legal, accounting or tax advice consult the appropriate professional.
ANNUITY PURCHASE RATES
Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)
Retirees (duration of 7) – 5.21%
Term Vesteds (duration of 10) – 5.25%
Actives (duration of 15) – 5.14%
Annuity Purchase Rates as of November 1, 2022