The U.S. pension risk transfer market is on a record-breaking trajectory, with an overwhelming 89% of companies planning to divest all their defined benefit (DB) pension plan liabilities, according to MetLife’s 2023 Pension Risk Transfer Poll.
This indicates that the momentum witnessed in recent years is set to continue, with an average timeframe of 4.1 years for full divestment.
Elizabeth Walsh, Vice President, U.S. Pensions at MetLife, points to a favourable environment for derisking, driven by macroeconomic factors.
She notes, “Inflation and rising interest rates continue to be catalysts for plan sponsors to derisk.” This marks a significant shift from 2015 when PBGC premium increases and new mortality tables were the primary motivators.
The 2023 Poll identifies macroeconomic concerns as the primary catalysts for initiating pension risk transfers to insurers. These include inflation (49%), market volatility (42%), rising interest rates (42%), and recessionary concerns (31%). Additional factors include a growing volume of retirees (42%) and favourable annuity buyout market pricing (35%).
The survey reveals that plan sponsors are proactively preparing for future transactions. An impressive 94% are assessing their DB plan’s value against benefit costs, while 91% state that corporate management is giving significant attention to their DB plans.
Over the past two years, sponsors have taken practical steps to ready their plans for derisking, such as improving data quality (58%), increasing contributions (56%), involving C-suite executives in DB plan management (37%), and offering lump-sum distributions to terminated-vested participants (24%).
When ready to transact, almost 58% of plan sponsors intend to utilise an annuity buyout, either solely or combined with a lump sum.
Only 18% plan to use an annuity buy-in. Among those seeking an annuity buyout, about half (49%) plan to do so through a retiree lift-out, while only 21% attribute it to plan termination activity.
The poll also reveals that 77% of plan sponsors are aware of their ability to split a single annuity buyout transaction with more than one insurer. Notably, 88% of them express a willingness to split their transaction if it’s sizable enough.
Elizabeth Walsh comments, “Split deals make sense for very large and complex transactions, and we are likely to see more interest in these types of deals moving forward.”
The survey suggests that the average size of an annuity buyout transaction required for plan sponsors to consider splitting it is above $400 million.
In terms of their derisking strategy, more than half (55%) of plan sponsors surveyed plan to transfer risk through a series of annuity buyout transactions, while 45% favor a single annuity buyout transaction.
The MetLife 2023 Pension Risk Transfer Poll was conducted online between July 5 and July 27, 2023, by MMR Research Associates, Inc. It garnered responses from 250 DB plan sponsors with $100 million or more in plan assets who have derisking goals, including 41% with DB plan assets exceeding $500 million.
