Pension Sponsors Turning to Annuity Purchases to Plug Risk

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By David B. Brandolph

Billions of dollars in pension liabilities were transferred to insurers in the last week, showing just how popular annuity purchases have become as a way for employers to unload pension risks.

“There’s a lot of headroom available for annuity purchases, as many sponsors have already used other risk transfer strategies,” Richard McEvoy, leader of Mercer LLC’s financial strategy group in New York, told Bloomberg BNA June 26.

Sponsors have long used annuity purchases to unload pension obligations, but the strategy is expensive.

The volume of pension-risk transfer deals has been expanding in recent years, to more than $13 billion in both 2015 and 2016, according to industry group LIMRA. Annuity purchases could approach or exceed $20 billion in 2017, McEvoy said.

Hartford Financial Services Group on June 26 announced that it was purchasing about $1.6 billion in annuities from Prudential Financial Inc. Three days earlier, Accenture announced it had completed the termination of its pension plan by transferring $1 billion in pension obligations to MassMutual and American General Life Insurance Co. Mercer was the lead adviser to both companies in their recent risk transfer deals.

Many sponsors have already taken advantage of lump-sum payment offers to plan participants and have increased the portion of long-term corporate bonds in their investment portfolios to match pension obligations and reduce investment risk.

Most plan sponsors want to focus on their core business rather than have to deal with pension risks, Scott Kaplan, senior vice president of Prudential Financial’s pension risk transfer group in Newark, N.J., told Bloomberg BNA June 26. Many are looking to the purchase of annuities as a way to further reduce their risk exposure, he said.

What’s Driving Annuity Purchases?

High variable rate premiums charged by the Pension Benefit Guaranty Corporation to plan sponsors with underfunded plans appear to be a major motivator for plans to both increase plan contributions and to transfer pension risks.

The better funded a plan is, the better position a sponsor is to purchase annuities from an insurer, McElvoy said.

In the last year or two, plans have even found it advantageous to borrow money to make plan contributions and reduce PBGC premiums, Kaplan said.

The expectation of lower corporate interest rates being discussed as part of tax reform proposals is also driving increased contributions and greater consideration of risk transfers. Sponsors can get a bigger deduction by overloading contributions this year than they would be able to if rates are lower next year.

“There’s no penalty for acting sooner, but there could be a penalty for acting later,” Kaplan said.

To contact the reporter on this story: David B. Brandolph in Washington at dbrandol@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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