Plan Today for More Effective Pension De-Risking Tomorrow By: Justin Adamitis

Today’s highly volatile, hyper-competitive business environment makes sponsoring a defined benefit pension plan a particularly challenging obligation. Plan sponsors must manage through concerns such as financial statement unpredictability, plan contribution uncertainty, escalating Pension Benefit Guaranty Corporation (PBGC) premiums, and increasingly complex regulatory requirements. Combined, these issues create significant business risk over the long term.

When the pension plan detracts from the business plan, it’s time for organizations to refocus on what rewards themselves and their shareholders. Accordingly, plan sponsors of all sizes and sectors are now embracing pension risk transfer as a means of improving their financial health, while strengthening their employees’ retirement benefits. With new mortality assumptions amplifying plan liabilities even further, the market for pension buy-out solutions is expanding steadily.

United States Single Premium Buy-Out Sales

Source: LIMRA. Sales results based on non-constant group of companies and reported in millions ($000,000)

Whether pension risk transfer is imminent or only a consideration, there are steps plan sponsors can take today to heighten transaction effectiveness, particularly if they are pursuing the most conclusive form of risk transfer—the pension buy-out.

With a pension buy-out transaction, a plan sponsor transfers the investment and longevity risk associated with its pension liabilities to an insurance company. The insurer, in turn, commits to making guaranteed annuity payments to each covered participant. Buy-out transactions reduce or remove plan liabilities, eliminate PBGC premiums, and unburden sponsors of administrative, actuarial and investment management expenses. Pension buy-outs are irrevocable, and may trigger settlement accounting and reduce plan funded status.

Preparing for and executing a pension buy-out agreement involves four distinct phases, with the level of effort required in each phase varying dependent upon the transaction’s size and complexity. 

The phases are:

Preparation. In this stage, the plan sponsor will designate an internal team to be accountable for the pension risk transfer process. The team will work with an external advisor, define transaction objectives and identify any impediments. As the transaction strategy becomes clear, the sponsor will organize its plan data, determine its best source of transaction data—i.e., actuarial data or administrative data—and analyze data quality as it pertains to insurers’ requirements. 

This phase also includes further development of the transaction strategy from a liability perspective. In many instances, this begins with a close examination of various transaction options; for example, the type of buy-out, the potential inclusion of lump-sum offerings, and the retiree/employee populations for whom liabilities will be transferred. In addition, sponsors of plans with less than $500 million in plan assets will begin developing a strategy for liquidating the portfolio, because the group annuity premium is most often paid in cash.

Feasibility. At this point, the plan sponsor will provide its transaction strategy and data to insurers through a Request for Proposal exercise, enabling the sponsor to:

• Assess the insurers’ interest in the transaction
• Provide plan-specific details, such as census data, deferred benefit provisions and annuitant demographics
• Obtain indicative pricing

By the end of this phase, the feasibility of the transaction becomes clear. Further, the sponsor should now establish a governance process, so it can quickly acquire necessary approvals as the transaction progresses.

Structure and Refinement. The plan sponsor will require time to analyze results from the feasibility phase, and to refine transaction specifics. During this stage, data is further scrubbed for submission to insurers, who, in turn, provide formal pricing. Because selecting an insurer for the annuity transaction is a fiduciary decision, the plan sponsor must now determine which party will serve in a fiduciary capacity during the buy-out process. What’s more, the strategy for achieving required regulatory approval, if needed, is defined in this phase, contracts are finalized, and the asset portfolio is re-positioned for stability and liquidity.

Execution. The final stage of the pension buy-out now occurs. The group annuity contract is executed, funds are transferred to the insurer, and any necessary data reconciliations take place. This phase is characterized by extensive communication between the plan sponsor, its administrators and the insurer.
Adhering to a well-thought-out plan and collaborating with a skilled insurer is imperative to a seamless pension risk transfer agreement. Plan sponsors can begin today by getting their data and governance process in good order, and conducting initial high-level feasibility assessments of a potential transaction. Those sponsors who take these steps today will be at an advantage relative to those who don’t.

For more information about transferring pension obligations to an insurer, read Prudential’s white paper titled Preparing for Pension Risk Transfer, located at

Insurance products are issued by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or The Prudential Insurance Company of America (PICA), Newark, NJ. Retirement products and services are provided by PRIAC. Both are Prudential Financial companies. Each company is solely responsible for its financial condition and contractual obligations. 

© 2016 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. 

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Justin Adamitis

Justin Adamitis is a director on the distribution team supporting Prudential’s Pension Risk Transfer business. Justin is skilled at identifying and delivering solutions that help plan sponsors mitigate the financial statement impact and risk associated with their qualified and nonqualified plan liabilities....

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