A retired client is on the line seeking your advice about a letter she just received from her previous employer’s pension plan administrator. The letter states that the employer is terminating the pension plan that pays her monthly retirement benefit. Once regulators have approved termination, the plan will transfer its obligation to pay her benefits to a yet undetermined insurance company. “What should I do?” she asks.
If you haven’t encountered a pension buyout yet, the odds are increasing you will. According to a March 5, 2015 LIMRA Secure Retirement Institute press release: “Group pension buy-out sales reached $8.5 billion in 2014, a 120 percent increase over the 2013 total of $3.8 billion.”
Buyout activity levels can be difficult to interpret because a few large deals can make the market look more active; nonetheless, the quantity of transactions is growing. LIMRA Secure Retirement Institute reports that the number of buyout contracts grew to 277 in 2014 from the previous year’s 217. The number of insurers offering buyouts also grew by two to 11.
Companies’ pullback from defined benefit pension plans has been widely reported for years. That trend is understandable, according to Lynn Esenwine, distribution vice president for Prudential’s Pension Risk Transfer business. Managing a large pension plan has started to resemble managing an insurance company portfolio, she notes.
Company executives must deal with volatile financial markets while monitoring benefit funding levels and their impact on financial statements. Additionally, mortality assumptions recently changed while insurance premiums and underfunding penalties from the Pension Benefit Guarantee Corp. (PBGC) have increased steadily.
“If you are the CFO or treasurer of an organization and looking at cash flows and managing a pension plan, you’re starting to wonder, is this a good business for me to be in, trying to understand how long people are going to live?” she asks.