Increasing premiums to the Pension Benefit Guaranty Corp. (PBGC), combined with asset-related volatility and increasing life expectancies are amongst the top reasons finance executives transfer pension exposure to an insurer, according to a new survey by CFO Research and Prudential Financial, Inc.
A new survey including the responses of 80 senior finance executives at firms with traditional pensions reveals the main reasons companies transfer their pension risk to re/insurance firms, a trend that appears to be increasing.
According to the report “persistent asset-related volatility, often driven by low interest rates,” combined with “sharply rising premiums to the Pension Benefit Guaranty Corp., which insures corporate pensions against default,” and “growing life expectancies of beneficiaries, which increase payout,” are three of the main drivers for finance executives’ decision to transfer pension risks.
Scott Kaplan, head of pensions risk transfer at Prudential Retirement, said; “Senior finance leaders are very much aware—as this survey makes clear—of the pain points that DB pensions can create for well-run companies.
“But these executives are equally mindful of how pension risk transfer can lessen the increasing costs and volatility that pension plans can create for a company’s finances. These agreements enable companies to concentrate on what they do best, while fulfilling their sacrosanct promise to employees and retirees.”
The survey shows that a large number of executives have already transferred some of their pension risk to re/insurers, or at least plan to do so, underlining the potential for the market to continue expanding and, providing insurers and reinsurers with an opportunity to increase their participation in the space.
Of those that have already passed some of their pension risk to insurers, in the coming years, 72% plan to transfer some additional exposure, according to the report. With 83% of the same respondents being “completely satisfied with all aspects” of their annuity purchase.
A huge 86% of respondents felt that pension risk transfer helped their company keep their promises to both employees and retirees. While 81% said their clients were happy to receive pension cheques from an insurance company.
21% of those companies that are yet to transfer any pension risks plan to do so within the next two years, another sign of the potential opportunity for insurers and reinsurers.
Also increasing the opportunity for re/insurers is the recent changes in mortality assumptions, with 33% of survey respondents highlighting this as a reason to consider transferring at least some of their pension risks. Furthermore, 36% of respondents said recent increases in PBGC premiums make it more likely their firms will purchase a group annuity in the near term.
Potential changes to the tax and regulatory environment in the U.S. could also drive more companies to look at transferring pension risks, with 55% of respondents stating that reducing the tax rate in 2017 would lead them to consider this within the next year.
“This survey shows how important the topics of interest rates, tax policy and longevity—and their interactions—are for the future of companies that offer traditional pension plans. Such issues are clearly top of mind among finance executives who are responsible for fulfilling pension promises,” said Kaplan.
