Retirement Solutions | Case Study

Securing Pensions Through Risk Transfer

About the Author

Sean Brennan

Partner, Executive Vice President Head of PGA & Reinsurance, Athene

About the Author

Sean Brennan

Partner, Executive Vice President Head of PGA & Reinsurance, Athene

We’re focused on securing pensions so people can retire better and companies can focus on what they do best.

Now is the time to de-risk your legacy pension plan. According to the Investment Company Institute, over $3.5 trillion in defined benefit plan assets sit on US corporate balance sheets.1

Since traditional pensions haven’t been part of compensation packages at private companies for years, these assets are committed to plans that have been frozen. They’re not adding to the bottom line or benefiting the current workforce. To complicate things further, insurance premiums and administrative costs continue to increase. And matching plan liabilities is a specialized discipline that exposes plan sponsors to balance sheet risk, earnings risk and cash volatility.

To meet their obligation to plan participants, companies with legacy plans manage a complex and costly benefit with limited resources and scale. It’s not surprising that many are exploring strategies that will allow them to de-risk their portfolios by transferring all or a portion of their liabilities to insurers.

The pension risk transfer trend

I had the opportunity to speak with Wharton Business Daily to discuss how pension risk transfer (PRT) transactions have dramatically increased in size and number over the past five years. According to LIMRA, 2021 was a record year in the PRT space, with insurers negotiating nearly $40 billion in buy-in and buy-out deals.2 A good number involved large companies with significant plan liabilities.

What’s driving this trend?

  • In part, it’s that for many companies maintaining legacy plans has become a strategic distraction that is a drain on financial and human capital.
  • Many of these plans have been frozen since the early- to mid-2000s.
  • While regulatory changes have brought more mark-to-market volatility, recent market conditions have driven increased funding levels. As a result, 2021 saw funding levels at their healthiest since 2007.
  • Nonetheless, over that period, funding levels still dropped about 30% and remained there for much of that time.

While mandatory contributions helped, companies began looking at PRT solutions with insurers as a viable alternative. Using company capital to enable PRT transactions has offered attractive risk-adjusted returns compared to alternative uses.

COVID fast-forward

COVID then accelerated the trend by raising awareness of embedded pension risks, even in plans that appeared well funded. Funding levels dropped 12% almost overnight in March 2020, which equates to about $300 billion in assets that disappeared in an instant, leaving companies struggling with how to operate in uncharted waters, while also navigating their core business and workforce disruptions. This experience was an acute reminder that it is very hard to continue to be a top competitor while spending scarce time and resources on legacy liabilities, away from a company's core business.

PRT solutions help companies focus on their mission while assuring plan participants retirement security

As funding levels then bounced back, companies have accelerated their search for de-risking solutions. While some are looking to wind up the entire plan, others are finding other means to reduce cost and mitigate risk. Working in parallel, insurers have continued to develop and refine a deeper understanding of pension liabilities and mortality experience to accurately underwrite pension obligations.

The end result has been a significant and sustained increase in deals over the past several years, especially among insurers committed to the PRT space. And even with a record nearly $40 billion in transactions in 2021, $3.5 trillion in pension assets on corporate books suggests a huge opportunity for growth going forward.

Athene is uniquely well positioned to provide de-risking solutions

Athene is a retirement services provider that is very attuned to the employer and industry challenges that lie ahead. Managing net investment spread liabilities is core to our business. Our mission is to help people retire better while providing institutional clients with solutions for complex problems. We’re very focused on the retiree experience, both in making sure that we have the assets to provide for their retirement security, but also putting the administration in place so that they receive their paychecks on time. For more details on the value of pension risk transfer, listen to the entire interview.

Contracts are issued by Athene Annuity and Life Company, West Des Moines, IA, in all states (except New York), and in D.C. and PR. For New York residents, contracts are issued by Athene Annuity & Life Assurance Company of New York, Pearl River, NY. Payment obligations and guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company. Products may not be available in all states.

1. Quarterly Retirement Market Data, Q3 2021, Insured Retirement Institute.

2. Group Annuity Risk Transfer Survey, Q4 2021, LIMRA.

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