The Rise of Pension Risk Transfers in the U.S.

May 2024

In recent years, an increasing number of employers with defined benefit (DB) pension plans in the United States have been looking at ways to improve their financials, specifically ways to reduce risks associated with these plans. One option that continues to gain momentum is transferring risks to insurance companies through pension risk transfer (PRT) transactions. This trend has been driven by several factors, including:

• Rising pension obligations. As life expectancies increase and interest rates remain historically low, the cost of funding DB pension plans are high, putting pressure on employers’ balance sheets.
• Volatile equity markets. Pension plans are subject to market conditions, which can lead to funding shortfalls and increased contribution requirements for employers.
• Accounting and regulatory changes. Changes in accounting rules, such as those introduced by the Financial Accounting Standards Board (FASB), have made it more challenging for companies to manage their pension plan liabilities on their balance sheets. Additionally, regulatory changes, such as those introduced by the Pension Protection Act of 2006, have increased funding requirements and costs.
• Risk management. PRT allows employers to reduce company risks associated with managing a DB pension plan, including investment risk, longevity risk and interest rate risk. According to Metlife’s 2023 Pension Risk Transfer Poll, the top three catalysts for a plan sponsor to initiate a PRT transaction to an insurer are inflation (49 percent), market volatility (42 percent), and rising interest rates (42 percent).

What is a Pension Risk Transfer (PRT)?

A pension risk transfer, also referred to as a plan buyout, plan life-out or plan termination, is a transaction in which a plan sponsor sends part or all its defined benefit pension plan obligations to an insurance company. The insurance company receives premiums and in return, assumes responsibility for protecting promised pension benefits to plan retirees and beneficiaries. There are two main types of pension risk transfer annuity solutions:

1. Buy-Out Transaction: In this type of transaction, the insurance company takes responsibility for the assets and liabilities of a pension plan or portion of a pension plan. The plan sponsor is relieved from future obligations.
2. Buy-In Transaction: In a buy-in transaction, the plan sponsor retains the pension plan and its assets but purchases a group annuity contract to cover a portion of the plan’s liabilities. This type of transaction could be an intermediate step to a full plan termination or a way to reduce risks while maintaining a plan.

Size of the U.S. Market

The PRT market in the U.S. has experienced significant growth in recent years. Since 2012, there has been almost $320 billion in sales. In 2023, the total value of PRT transactions totaled $45.8 billion, down 13 percent from 2022. Due to the size of some of these transactions, there is some level of volatility in yearly sales totals. 2023 was still the second-strongest sales year behind record-year 2022.

Benefits for Annuitants in a PRT Transaction

There are clear benefits for plan sponsors to de-risk or transfer their pension obligations to insurance companies. There are also benefits to the individual. Three key benefits for participants would be:

• Insulation from employer’s financial condition. Many traditionally important industries like manufacturing have struggled in the new economy. Many of these plan sponsors have large pension liabilities that are larger than their current market caps. Following a PRT transaction, the pension benefits are no longer tied to the financial health of the annuitants’ former employer. This insulates them from the risk of the employer defaulting on pension obligations due to bankruptcy or other financial difficulties.
• Increased benefit security. The participants’ benefits will now be backed by the claims-paying ability of highly regulated and capital-infused insurance companies. This could provide more peace of mind for the participant and seamlessly lets the retiree or beneficiary receive their pension income.
• Simplification of the process. After a PRT transaction, the participants no longer need to deal with the administrative headaches of an employer’s pension plan. The insurance company takes over the responsibility for benefit calculations, payments and communication.

Where is the Market Heading?

Looking ahead, I expect the PRT market to continue to grow and be a go-to solution for employers that further seek to manage the risks and liabilities associated with their DB pension plans. With about $3 trillion private sector DB plans, the opportunity for continued PRT transactions is strong. Some estimate that we could see more than $1 trillion in PRT transactions in the coming years. According to Metlife’s 2023 Pension Risk Transfer Poll, going forward, 9 in 10 companies plan to completely divest all of their DB pension plan liabilities in an average of 4.1 years. To support this growth, we could see a couple of things: We will likely see other financial and annuity innovations aimed at reducing risks, lowering costs and providing new solutions to plan sponsors and insurance companies. In addition, insurance companies have created artificial intelligence (AI)-supported underwriting capabilities. These platforms can use predictive analytics to streamline and accelerate the PRT process, which can improve pricing and execution efficiencies.

From an industry headwind standpoint, there have been recent lawsuits filed against companies that have transferred pension obligations to insurance companies. Current activity could slow as plan sponsors get more clarity around the potential ERISA litigation risk. That being said, I believe we could see PRT sales for 2024 reach or exceed $50 billion.