Most employers with traditional defined benefit (DB) plans are interested in transferring their pension plan risk off their books, according to a retirement plan industry think tank that measures pension buyout activity.
LIMRA Secure Retirement Institute in October 2016 surveyed 258 employers that sponsor DB plans and reported on March 7 that eight of 10 showed interest in selling their pension plan risk to a third party. There has been a significant increase since 2014 in so-called pension risk transfer (PRT), or derisking, LIMRA said. In fact, in the most recent survey, four of 10 employers canvassed said they were very interested in shedding their pension obligation, a 10-percentage-point rise from the institute’s 2014 survey.
Derisking allows an employer to transfer all or part of its pension liability to an insurer to remove the liability from the company’s balance sheet and reduce the volatility of the plan’s funded status.
Buyout Sales Rose in 2016
LIMRA reported pension risk transfer buyout sales totaled $13.7 billion for 2016, an amount almost 1% higher than in 2015 and the second highest annual total recorded.
More than a quarter of employers with DB plans said low interest rates dissuade them from considering pension risk transfer because low rates make it difficult for sponsors to keep their plan adequately funded. The LIMRA survey found that 80% of those surveyed are less than 90% funded.
For every unfunded dollar in a DB plan, an employer is required to pay the Pension Benefit Guaranty Corporation (PBGC) a premium. Variable PBGC premiums have been on the rise in recent years, and are scheduled to reach 4.1% of unfunded liability by 2019, soaring from 0.9% in 2013.
LIMRA said that for those employers with DB plans that indicated they were not interested in derisking, lack of knowledge was the top reason given.
The institute said its research shows that the proportion of employers with frozen DB plans has increased by 7 percentage points from 2014 to reach 57% in 2016.
“This is a positive trend for the PRT market because freezing a plan is one of the first actions a plan sponsor must take on the path to a buyout,” LIMRA said in a press release about the survey. It said employers with frozen plans showed more interest in pension-risk transfer products (84%) than those that haven’t frozen their plans (69%).
The full report, “Heating Up Plan Sponsor Interest in Pension Risk Transfer (2017)” is available to LIMRA members only.