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Aon Retirement and Investment Blog

A Rising Tide in the US Pension Risk Transfer Marketplace

U.S pension risk transfer market activity has been steadily growing since 2012, when landmark transactions executed by General Motors and Verizon initiated the current era of large buyouts. Data shown below confirms that while total transaction premium grew by a modest 5% in 2016, transaction volume increased nearly 45% driven by an increasing number of plan terminations and small retiree benefit lift-out transactions due to increasing PBGC premiums and the attractive cost-benefit analysis for this participant group.

What does this mean for pension sponsors evaluating a potential annuity settlement transaction? Below are some specific areas worthy of further consideration.[1]
Transaction Readiness– the insurance marketplace is focused primarily on supporting transaction-ready plan sponsors. Thus it is important to conduct annuity pricing analysis and company decision-making prior to soliciting the insurance marketplace. Being able to demonstrate to insurers that preliminary deal economics and corporate approvals have been considered are important steps to obtain optimal insurer pricing as sponsors move closer to deal execution. With an increasing number of sponsors expected to be interested in small retiree benefit lift-out transactions (to reduce PBGC premiums), it is imperative to assess the business case and corporate approval process prior to engaging with insurers.
Fiduciary Governance – plan participants are directly impacted in any annuity transaction. The fiduciary decision to select an annuity provider is among the most important decisions a Plan Fiduciary will make. Plan fiduciaries, as evident from guidelines provided by the Department of Labor, should seek the support of an experienced independent annuity expert and carefully consider to what extent that advisor may acknowledge that their services constitute investment advice under ERISA. Sponsor’s undertaking larger transactions ($500 million+) may want to explore retaining the services of an Independent Fiduciary.
New Insurer Entrants – a by-product of the robust marketplace growth shown above is an influx of new insurers into the annuity marketplace. These companies each have varying creditworthiness and administrative capabilities which need to be carefully considered as part of the fiduciary decision-making.

Transaction Timing – Deal volumes typically increase throughout the year, peaking in the fourth quarter. While insurers have been flexible at accommodating transactions, pricing resources can become constrained which may limit certain insurers from participating on certain transactions. Sponsors should consider their ability to execute before the fourth quarter.
Putting it all together, the pension risk transfer market continues to exhibit strong growth in the US, which presents both opportunities and challenges for pension sponsors seeking to execute a pension annuity settlement transaction.

Jay Dinunzio is a Senior Consultant in the Institutional Annuity and Life Insurance Solutions team within Aon Hewitt Investment Consulting, based in Wethersfield, CT.

[1] The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

Content prepared for U.S. subscribers, but available to interested subscribers of other regions.

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