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
- Create model to analyze lump sum PRT opportunities including the following:
- Assess Plan Lump Sum Settlement Liability
- Tranches to Consider
- Funding Impact (if implemented)
- Accounting Impact (if implemented)
- Future Cash Contributions
- Readiness Assessment
- Outline Project Plan, Timing and Other Key Considerations
- Create model to analyze annuity placement PRT opportunities including the following:
- Assess plan annuity placement settlement liability
- Tranches to Consider
- “Waterfall” Analysis (Reconciles GAAP Liability and Future Expenses to Settlement Liability)
- Funding Impact (Accounting Impact)
- Future Cash Contributions
- Readiness Assessment
- Effect with Interest Rate Changes
- Outline Project Plan, Timing and Other Key Considerations
- Ongoing PRT Monitoring
- PRT Pricing
- Interest Rates
- Insurance Carriers’ Pricing Considerations
- Overall PRT Market and Regulatory Updates/Board Education
- Educate Board on PRT Strategies
- Assist Board in Creating Trigger Points for Implementing PRT
- Implementation
- Implement PRT on Behalf of Client
- Assist with Transfer of Assets
- Assist with Transfer of Required Participant Data
- Assist with Communications to Participants
- Due Diligence
- Provide Required Due Diligence in Regards to DOL 95-1
- Review ALiRTTM Model with All Interested Parties
- Full Access to BCG’s Analysts
- 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)