The improved funded status of pensions, thanks partly to higher interest rates, make PRTs a play worth considering.
The need for pension teams to foster strong partnerships with other groups, hire an experienced external advisor and, for some, find a separate, independent fiduciary to select insurance companies emerged as key takeaways from a presentation about pension risk transfer (PRT) transactions at a recent meeting of NeuGroup for Pensions and Benefits.
- The complexity of PRTs makes it essential that the finance team responsible for the pension works closely and collaboratively with the communications (internal and external), HR and legal (ERISA counsel) teams.
- An external advisor offers the corporate embarking on a PRT or partial PRT valuable advice around the entire process, including financial, legal and communications matters.
- Takeaways from the session are especially relevant today, with higher interest rates boosting the funding levels of many companies’ defined benefit plans, a key consideration for finance teams contemplating PRTs and moving pension obligations off corporate balance sheets.
Picking insurers and plan participants. One revelation from the presentation for some members was the standard practice in large PRT transactions of hiring an independent fiduciary to select the insurance companies taking on the corporate’s pension obligations.
- Transactions of this nature draw scrutiny from many stakeholders, some of it about the selection of the insurance companies. So most companies doing PRTs over $1 billion make the decision to hire an independent fiduciary to help them manage that part of the process.
- Corporates that are not transferring all their pension liabilities in a PRT must decide which participant obligations go to an insurer and which stay with the company. Advisors help determine so-called benefit thresholds. One approach is to select participants with the lowest benefits to maximize the number of participants and thereby lower variable PBGC premiums corporates pay but insurers do not.
- Another consideration in making the benefit threshold decision is maintaining the option of, at some point in the future, transferring the obligations of participants who remain in the corporate’s pension plan. That requires, among other steps, mortality analysis to ensure the remaining population will be attractive to insurers.
Difficulty and complexity. Companies contemplating the transfer of pension assets to an insurer should expect some potentially uncomfortable conversations with external asset managers. Especially difficult is telling managers who outperformed benchmarks that the corporate’s pension team is reducing or terminating their mandates, just weeks before a transaction is announced.
- Once the assets are transferred (to a separate account), the challenge is coming to an agreement with the insurer on their value, another complex process where an advisor can play a key role.
- A final takeaway from the session: PRT transactions are difficult and the challenge of doing them should not be underestimated. One word to the wise: companies that have the discipline early on to avoid making a PRT overly complex in the hopes of achieving perfection—however that is measured—usually have positive outcomes.