Readers of this periodical are aware that pension risk transfer (PRT) is a process through which a company can transfer, for a price, the responsibility — financial, administrative, or both — of their defined benefit pension plan(s) to a third party, through the purchase of a group annuity. PRT deals are maintaining a hefty pace as companies look for new ways to manage these plans. Simply put, PRT is hot right now. Further, I’d make the argument that while it may be less obvious amid all this action, PRT can be a tool for broader economic benefits.
Facing fundamental changes in employment and companies’ own shifts to defined contribution plans, we now see many plans as legacies of past times.
Enter PRT, which has been gaining momentum even as the global economy reverberates from the shock of this year’s COVID-19 pandemic. Let’s look at some key moments in PRT leading up to this year, and then we’ll dive deeper into why it’s going to be an even more important tool in the coming years, even decades.
The PRT market in the U.S. started to kick off in earnest in 2012 with the GM and Verizon deals, for a combined total of $36 billion. From that year on, the market has continued to grow. In 2019, the transfer of pension obligations to domestic life insurers through buy-ins and buyouts amounted to $30 billion, the highest total since 2012. In 2019, two of the largest deals in the U.S. were Baxter International Inc. which transferred $2.4 billion in U.S. pension plan liabilities and Lockheed Martin, which secured a $1.9 billion buyout. Meantime, Bristol-Myers Squibb Co. transferred the remaining $200 million of a $3.8 billion buyout announced in 2018. In the U.K. activity continued apace, with some £40 billion in PRT deals getting completed, including our own £4.6 billion Rolls-Royce buyout, and the continuation of our ICI buy-in, which including our most recent transaction, to date adds up to £5.8 billion. We may see a somewhat smaller market this year, but we’d attribute that more to the COVID-19 pandemic than to any winding down of the need for this type of transaction.
What is making PRT so attractive, even in the middle of a pandemic? As briefly explained , a number of slow-burning cultural and economic shifts are changing the value of pensions for everyone involved. For many employers, traditional defined benefit pension plans are becoming increasingly hard to maintain; for some companies, they have become unanticipated burdens requiring continued additional funding together with administrative time and effort; in other cases, ownership of those companies may have changed one or more times since the original plan was put into place. Some pensioners who are currently in their 80s started work in the 1960s or even the 1950s, since which time their companies and retirement benefits have gone through countless changes.
Beyond this, however, is much broader opportunity to effect change. Importantly, in transferring that risk to an insurer, a company is not only achieving the sum of the parts of the deal — the offloading of risk for a price. Rather, in undertaking these transfers, the involved parties have the opportunity to fund some of society’s most pressing needs, today.