Considering cost is crucial when evaluating the benefits of a pension risk transfer.
The pension risk transfer (PRT) market stayed hot this year after setting a record in 2022 that included a $16 billion transfer by IBM. And there are signs—both qualitative and quantitative—that PRT volume will continue to grow as more companies with well-funded plans seek to remove pension liabilities from their balance sheets.
- “Anecdotally, treasurer-level members have indicated that doing a PRT transaction is likely,” said NeuGroup’s Scott Flieger, who leads NeuGroup for Pensions and Benefits as well as NeuGroup for Mega-Cap Treasurers. And a recent MetLife survey shows that 90% of pension managers are considering a PRT.
Not so fast. Not everyone is jumping on the PRT bandwagon, though. One big reason is cost—because in a PRT, a corporate typically pays an insurer a premium to take over its portfolio of pension liabilities and the costs of running the plan.
- “My sense is the market for PRT is expensive,” one member said. “We’re not averse to doing one, but we need to view it through an economic lens compared to what’s at risk.”
- He’s not alone. At a recent meeting of the pensions group, members discussed how they are assessing the merits of a risk transfer against an often steep price.
Watch the scoreboard. Part of the cost calculus is informed by the risks the corporate retains by continuing to manage the pension itself. That risk is often seen as less significant for plans that are overfunded and could make use of a surplus at some point—a potential reason to postpone or avoid a PRT.
- “I think about it in terms of American football,” one member said. “If assets are our points, and liabilities are our opponents, maybe there’s a scoreboard on the side of the field that currently states we have 19 in assets, and the opponent has 13 in liabilities. But it’s only the end of the first quarter—if I wait until the end of the game, that 13 has somehow gone down to zero, and my team has had many more touchdowns.”
- Another member agreed and said corporates with cash left over “after the game” have flexibility on how to use a potential surplus. “When you’re starting to feel safe, that’s great, then you start looking for how to use it,” he said. “You should start looking for things like 401(k) matching and maybe even paying bonds from the surplus.”
- The first member said, “There may be a point where it is worth waiting for the plan to terminate, to allow the scales to tip, but there may be a point when you don’t want to wait any longer. That’s what we’re trying to figure out: are we already there?”
Self-management. Members who aren’t already there and decide to continue managing a pension plan themselves will need to address the challenges of managing cash flows to meet their obligations. Representatives from meeting sponsor Insight Investment shared an approach that offers what they say is a more certain path to ensuring a plan achieves its goals while minimizing risk. It involves timing cash flows and harvesting income from fixed-income investments.
- “Cash flow matters as much as anything else,” said an Insight representative. “The trade-off is not only between assets and liabilities—it’s a three-dimensional problem. Some of the more obvious trade-offs involve cash flows, and this is how we think about our whole process.”
- Taking cash flow into account along with assets and liabilities may be especially relevant for fully- or over-funded defined benefit plans and particularly for those closer to their end state, according to Insight.
- “Cash outflows can be very significant for pension plans heavily in decumulation,” said Ciaran Carr, who heads Insight’s North American Client Solutions Group. “Plans that fully consider cash flow exposures within their investment framework may prefer to opt for self-management over a PRT.”
