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

  1. Create model to analyze lump sum PRT opportunities including the following:
    1. Assessment of plan lump sum settlement liability
    2. Tranches to consider
    3. Funding impact (if implemented)
    4. Accounting impact (if implemented)
    5. Readiness Assessment
    6. Project Plan, Timing and Other Key Considerations
  2. Create model to analyze annuity placement PRT opportunities including the following:
    1. Assessment of plan annuity placement settlement liability
    2. Tranches to consider
    3. “Waterfall” analysis (reconciles GAAP liability and future expenses to settlement liability)
    4. Funding impact (if implemented)
    5. Accounting impact (if implemented)
    6. Readiness Assessment
    7. Impact of Interest Rate Changes
    8. Project Plan, Timing and Other Key Considerations
  3. Setup customized buyout price monitoring
    1. Tracks a plan’s market value of assets versus Exit Liability, as well as exit funding ratio.
    2. 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.
    3. 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.
    4. 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.
    5. Delivered monthly via an interactive client portal.
  4. PRT Options & Board Education
    1. Lead educational meetings with Board on PRT strategies
    2. Assist Board in creating trigger points for implementing PRT
  5. Implementation
    1. Implement PRT on behalf of client
    2. Assist with transfer of assets
    3. Assist with transfer of required participant data
    4. Assist with communications to participants
  6. Due Diligence
    1. Provide required due diligence for compliance with DOL 95-1, including certification
    2. Review ALIRT model with all interested parties
    3. Full access to BCG’s analysts