Higher interest rates could incentivise the growth of U.S. pension-risk transfer business as rate changes make it less expensive for employers to transfer pension obligations, providing a further catalyst in what’s become a thriving cross-Atlantic longevity risk transfer business.
Chief Investment Officer of United Technologies Corp, Robin Diamonte, told the Wall Street Journal; “if interest rates go up, there definitely will be a lot (of employers) lining up to do this.”
In October last year, the U.S. aircraft manufacturer transferred around 35,000 pension plan participants to Prudential in a $775 million deal.
And across the Atlantic, Prudential has recently tied off another major longevity reinsurance transaction, forming a $1.2 billion deal covering liabilities associated with 22,500 pensioners, together with Rothesay Life.
Demonstrating, according to Prudential, a pension risk transfer market thriving in the UK, where appetite for “U.K. pension de-risking and the continuing focus among U.K. group annuity writers to optimize capital and manage risk with longevity reinsurance solutions.”
Prudential has been highlighted by the Wall Street Journal as one of the insurance companies at the forefront of the pension-risk transfer bandwagon; the insurer has so far taken on ten large-scale deals and holds nearly $45 billion of corporate pension obligations.
Prudential first began to seriously look into pension-risk in 2006, when investment volatility and costs saw employers begin to freeze traditional pension plans, the Wall Street Journal reported.
When tech-stocks imploded, and companies saw their pension plans drop, the insurance giant seized the opportunity for procuring risk-transfer solutions.
The insurer aims to earn a 12-13% long-term return on pension risk deals capital, earning interest on bonds it takes on, and capitalising on trading into higher risk loans.
Profit is expected to come from negotiating large-scale deals with prices that allow interest and eventually principal to cover payment of pension checks, explained the Wall Street Journal.
Some state regulators have established a 5-10% pension risk deal size capital reserve requirement for insurers to provide a safety net for consumer-interest.
David Lang, vice president of product development at Prudential, who led the $1.2 billion transaction, commented; “The growing U.K. market for pension de-risking has created a significant need for reinsurance solutions.
“As part of our long-term partnership, Rothesay consistently taps into Prudential’s longevity reinsurance capacity and expertise to support its market-leading pension risk transfer business in the U.K.”
This week’s expected interest rate rise is seen by some industry players as a further sign of longevity risk transfer growth as companies’ continue to reestablish their standard procedures for management of employees’ pensions as they seek a convenient and reliable means to transfer risk to protect company assets from exposure to stocks and bonds volatility.
In December, Fed interest rates rose for a second time since the 2008 financial crisis, up 0.25 percentage points to between 0.5% and 0.75%, and the industry has been bracing for a further expected rate increase, following Trump’s election.
With longevity risk transfer looking set for continued growth, the dragging re/insurance industry – struggling with pricing declines and shrinking space as new competitors emerge, the insurtech revolution grows, and alternative capital gains a growing market share – could be looking at its much needed impetus.
