Pension Risk Transfer

What is Pension Risk Transfer? 

PRT is a method used by Plan Sponsors by transferring all or some of the liability and/or risk associated with their pension plan by funding them with annuities or offering lump sums to the participants. 

Why should you transfer your pension risk? 

  • Reduces risk from your balance sheet
  • Reduce impact on funding levels and corporate accounting
  • Decrease the plan size
  • Change in the duration of the plans liabilities
  • Transferring risk to an insurance carrier 
  • Transact under your terms and conditions 

Current Challenges

  • IRS Termination Process (12-18 MONTHS)
  • Longevity risk maintained by Pension Plan
  • New IRS-mandated mortality tables in 2017
  • Interest rate risk borne by Pension Plan
  • Administrative burden on HR and Finance Staff
  • PBGC costs are significantly increasing
  • Volatile Market

Types of de-risking actions

  • Change pension plan design
  • Increase funding levels
  • Change the investment strategy
  • Offer lump sums
  • Implement a pension buyout

How it works

  1. Create model to analyze lump sum PRT opportunities including the following:
    1. Assess Plan Lump Sum Settlement Liability
    2. Tranches to Consider
    3. Funding Impact (if implemented)
    4. Accounting  Impact (if implemented)
    5. Future Cash Contributions
    6. Readiness Assessment
    7. Outline Project Plan, Timing and Other Key Considerations

 

  1. Create model to analyze  annuity placement PRT opportunities including the following:
    1. Assess plan annuity placement settlement liability
    2. Tranches to Consider
    3. “Waterfall” Analysis (Reconciles GAAP Liability and Future Expenses to Settlement Liability)
    4. Funding Impact (Accounting  Impact)
    5. Future Cash Contributions
    6. Readiness Assessment
    7. Effect with Interest Rate Changes
    8. Outline Project Plan, Timing and Other Key Considerations

  1. Ongoing PRT Monitoring
    1. PRT Pricing
    2. Interest Rates
    3. Insurance Carriers’ Pricing Considerations

  1. Overall PRT Market and Regulatory Updates/Board Education
    1. Educate Board on PRT Strategies
    2. Assist Board in Creating Trigger Points for Implementing PRT

  1. Implementation
    1. Implement PRT on Behalf of Client
    2. Assist with Transfer of Assets
    3. Assist with Transfer of Required Participant Data
    4. Assist with Communications to Participants

  1. Due Diligence
    1. Provide Required Due Diligence in Regards to DOL 95-1
    2. Review ALiRTTM  Model with All Interested Parties
    3. Full Access to BCG’s Analysts
    4. Provide DOL 95-1 Certification 

Path to de-risking

Buy-In

  • Plan Investment that perfectly matches liability
  • Insurer makes guaranteed payments to plan
  • Insurer covers investment and longevity risk
  • Does not trigger settlement accounting or reduce funded status
  • Convertible to buy-out any time
  • Plan purchases an annuity from an insurance carrier that is equal to a retiree’s pension benefits
  • The annuity becomes the property of the retiree
  • The assets of the plan fall by the cost of the annuity, the liabilities fall by the value that had been placed on the retiree’s benefit; which ultimately results in a small increase in the net shortfall
  • The plan maintains the liability risk

Buy-Out

  • Complete settlement of plan liability
  • Insurer makes guaranteed payments to participants
  • Insurer covers investment and longevity risk
  • May trigger settlement accounting and reduce funded status
  • Irrevocable
  • Plan purchases an annuity from an insurance carrier equal to the pension benefit
  • The annuity remains the property of the plan
  • The liabilities of the plan are unchanged; the assets now include the annuity (instead of the assets that were used to pay for it)
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