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Pension Risk Transfer

Last Updated: 1/31/2024

Issue: Historically, companies have adopted pension plans for many reasons, like attraction and retention of qualified employees, workforce management, employee expectations, and enhancing tax benefits. However, the total annual cost of offering a pension plan can be hard to predict and is costly to administer. With fluctuating variables like investment returns, interest rates, and the longevity of participants, companies have pursued a method called pension risk transfer (PRT) to move the financial liability and the program administration from the company to a life insurer.

A pension risk transfer is when a defined-benefit pension provider seeks to remove some or all of its obligation to pay guaranteed retirement income or post-retirement benefits to plan participants. In these transactions, the pension providers will generally transfer assets to a life insurer, for which the insurer assumes the annuity risk for plan participants. Other times the transfer may be initiated because of negotiations with unions to restructure the terms of the pension. According to AM Best, there were over 500 single premium pension contract buyouts totaling $28 billion in 2019. Due to organizations’ desires to alleviate their pension liability, it is expected that volume of PRT transactions will not subside anytime soon as companies transfer pension risk to avoid earnings volatility and enable themselves to concentrate on their core business demands.

The types of risks addressed in pension transfer transactions might include the following:

· The risk that participants will live longer than current annuity mortality tables would indicate (longevity risk).

· The risk that funds set aside for paying retirement benefits will fail to achieve expected rates of investment return (investment risk).

· The risk that changes in the interest rate environment will cause significant and unpredictable fluctuations in balance sheet obligations, net periodic cost, and required contributions (interest rate risk).

· The risks of a plan sponsor’s pension liabilities becoming disproportionately large relative to the remaining assets and liabilities of the sponsor.

There are four major types of pension risk transfer strategies. They are: (1) longevity reinsurance; (2) buy-in; (3) buy-out; and (4) paying in lump sums. Longevity reinsurance is actively used in the U.K. but not the U.S. A “buy-in” is when an insurer pays the monthly annuity amount to the plan, which continues to make pension payments to plan participants. On the other hand, a “buy-out” occurs when an insurer has a direct, irrevocable commitment to each covered participant to make the specified annuity payments.

Status: Pensions (and their related assets) transferred to life insurers are typically held in what are known as a separate account. Separate accounts are generally organized and structured in a manner to where their activities are legally separated from the normal operations of an insurance company. Separate accounts file a specific addendum to the life insurer financial statements, detailing the separate account assets, liabilities and activity in a separate blank, with the total assets and total liabilities of the separate account represented in the total assets and liabilities of the life insurer. Specific accounting provisions are detailed in SSAP No. 56—Separate Accounts.

Upon review of the separate account annual statements filed with the NAIC, it was found that most entities did not individually detail PRT activity, but rather broadly combined this product into other product categories (i.e., group variable annuity). However due to the recent (and future anticipated) growth of PRTs, regulators desired the capability to more easily identify PRT activity, particularly to allow for assessments on whether the assets held in the separate account are expected to adequately cover the obligations of the pension liability. If the assets are not sufficient, a life insurer’s separate account could require supplemental funding from the life insurer’s general account. So, while the assets held in a separate account are insulated from the obligations of the general account, in the event of a performance shortfall, the general account may be obligated to provide additional support to the obligations and commitments of the separate account.

To meet regulator needs for enhanced visibility on PRTs, in May 2021, the Statutory Accounting Principles (E) Working Group adopted agenda items 2020-37 & 2020-38, which did not result in changes to SSAP No. 56, but supported adoption of its sponsored agenda item (2021-03BWG) at the Blanks (E) Working Group. The blanks agenda item modified the separate account instructions and now requires that a distinct disaggregated product identifier be used for each product represented – thus PRTs are now required to be specifically and individually identified and disclosed. The new disaggregated reporting requirements require that each separate account product filing or policy form (i.e., each PRT) be separately identified. This disaggregation of reporting will also be utilized for all applicable General Interrogatories (e.g., 1.01, 2.4, 4.1). Subsequently on May 26, 2021, the Blanks (E) Working Group adopted its agenda item 2021-03BWG, which will result in these changes being in effect for year-end 2021 reporting.

In August 2023, the Statutory Accounting Principles (E) Working Group discussed the need to provide details of what is permitted under SSAP No. 56,. Also, the need to assess overall accounting, reporting, and risk-based capital (RBC), if the separate account blanks are being used as an extension of the general account or a segregated general account, as the accounting and reporting in the separate account is not designed with that original intent.

Committees Related to This Topic

Additional Resources

Pension Risk Transfer Poll: A survey of U.S. defined benefit plan sponsors
October 2023, MetLife

New Financial Instruments for Managing Longevity Risk
July 2020, Wharton Pension Research Council Working Paper

New Solutions to an Age-Old Problem: Innovative Strategies for Managing Pension and Longevity Risk
November 2019, North American Actuarial Journal

Pension Risk Transfer
October 2016, American Academy of Actuaries Issue Brief

Conning's Corporate Pension Review
April 2023, Conning & Co.



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