Pension Risk Transfer
What is Pension Risk Transfer?
Pension Risk Transfer (“PRT”) is the process of contractually transferring a defined benefit plan’s risks from a pension plan sponsor in order to eliminate or reduce balance sheet risk, longevity risk, investment risk, interest rate risk, and/or other risks. The two most common types of PRT are offering lump sums to a plan’s participants and purchasing annuities from an insurance company.
Why should you transfer your pension risk?
- When recognizing plan expenses, PRT is cheaper
- Reduce the size of the plan as a proportion of balance sheet
- Focus more on core business than managing pensions
- Plan is no longer a core part of retirement benefits for active employees
- Reduce balance sheet volatility
- Plan fully funded; transaction requires no cash contribution
- Eliminate risk to the plan sponsor
Current landscape
- IRS termination process (12-18 months)
- Longevity risk maintained by pension plan
- Interest rate risk borne by pension plan
- Administrative burden on HR and Finance Staff
- PBGC costs are significantly increasing
- Insurance carrier capacity/appetite
Types of de-risking actions
- Change plan design
- Accelerate contributions
- Change investment strategy
- Offer lump sums
- Implement a full or partial annuity buy-in or buyout
BCG’s approach from PRT analysis to implementation
- Create model to analyze lump sum PRT opportunities including the following:
- Assessment of plan lump sum settlement liability
- Tranches to consider
- Funding impact (if implemented)
- Accounting impact (if implemented)
- Readiness Assessment
- Project Plan, Timing and Other Key Considerations
- Create model to analyze annuity placement PRT opportunities including the following:
- Assessment of plan annuity placement settlement liability
- Tranches to consider
- “Waterfall” analysis (reconciles GAAP liability and future expenses to settlement liability)
- Funding impact (if implemented)
- Accounting impact (if implemented)
- Readiness Assessment
- Impact of Interest Rate Changes
- Project Plan, Timing and Other Key Considerations
- Setup customized buyout price monitoring
- Tracks a plan’s market value of assets versus Exit Liability, as well as exit funding ratio.
- Tracks a plan’s Exit Liability relative to comparison markers: minimum funding, lump sum, PBGC, accounting and annuity purchase, as well as tracks a plan’s exit premium (discount) over its accounting value.
- Tracks a plan’s exit premium (discount) relative to all comparison markers and provides view of the current month’s values alongside the 1-month, 3-month and 12-month changes in those values.
- Tracks a plan’s current status of pension de-risking actions implemented for each of the major plan management categories: Plan Design, Plan Funding, Asset Management and Liability Management.
- Delivered monthly via an interactive client portal.
- PRT Options & Board Education
- Lead educational meetings with Board on PRT strategies
- Assist Board in creating trigger points for implementing PRT
- Implementation
- Implement PRT on behalf of client
- Assist with transfer of assets
- Assist with transfer of required participant data
- Assist with communications to participants
- Due Diligence
- Provide required due diligence for compliance with DOL 95-1, including certification
- Review ALIRT model with all interested parties
- Full access to BCG’s analysts