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Life Health > Annuities > Fixed Annuities

Pension Risk Transfer Pricing for the Smaller Plan

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What You Need to Know

  • Jumbo employers make headlines with big pension risk transfer deals all the time.
  • Employers make those deals using group annuities.
  • The prices for smaller PRT annuities can be similar to the prices for the jumbo PRT annuities.

The first concern for any plan sponsor or fiduciary of a defined benefit plan, no matter the size, is providing the protected benefits and acting in the best interest of all the participants in the plan.

Whether a sponsor or fiduciary is transferring a portion of the plan liability to an insurance group through a pension risk transfer annuity purchase, or “lift out” transaction, or all of the plan liability is going to be transferred, through a “termination” transaction, the sponsor or fiduciary needs to complete a due diligence review of the insurance companies involved, in accordance with the U.S. Department of Labor’s 95-1 “Safest Available Annuity” guidance.

For the purpose of this discussion, we’ll assume this due diligence review is taking place for a PRT annuity purchase.

Now for the question at hand: “Can the small or medium size defined benefit plans garner the same annuity pricing as the jumbo plans during a PRT annuity purchase?”

The answer is: Yes.

If the smaller sponsor or fiduciary follows the same process as the larger plans, then the probability of attaining the same results dramatically increases..

Let’s review some key steps a larger plan sponsor will take.

Hiring a PRT Specialist

All large plan sponsors hire a pension risk transfer consultant when contemplating an annuity purchase to transfer some or all of the defined benefit plan liability.

This specialist will identify the processes and timing specific for the annuity purchase..

A couple of key factors to contemplate are when to hire the PRT consultant and what to look for when hiring the PRT consultant.

The first factor is easy to answer: the sooner the better.

Hiring an independent pension risk transfer consultant early in the process provides more options and organization. More often than not, it will produce a better result.

The second factor — “What to look for when hiring a PRT consultant?” — is a little more difficult to address.

There are many advisors anxious to help plan sponsors with this task, but are they the right ones?

Hiring a PRT consultant is a fiduciary decision, and the plan sponsor or fiduciary should follow some prudent steps when doing that.

Data, Data, Data

Data is everything.

A large-plan sponsor spends significant dollars and time cleansing the plan data.

The more holes there are in your data, the more assumptions will be made by the insurance companies. The more assumptions the insurance companies make, the higher the cost will be to transfer the plan liability to an insurance company through an annuity contract.

Of course, a smaller plan can make a point of providing clean, complete data.

A Strong Plan

Planning is essential for a large-plan sponsor to accomplish PRT transactions.

The plan determines how the timing on all the factors will work.

Those factors include how the plan assets should be invested, when the participants receive communications, what regulatory filings may need to be completed, when to market the liability to the insurance company, how to market the liability to the insurance company, what calculations need to made, how much to contribute to the plan, when to make those contributions, and when the insurance company can take over payments.

Without proper planning, the timing will need to be delayed.

This delay could increase the overall cost dramatically.

A successful plan will require input from the plan sponsor and all their advisors — actuarial, investment, legal, accounting and PRT consulting.

A small or midsize plan sponsor or fiduciary can get that kind of input about as easily as a jumbo plan sponsor.

The bottom line is: The optimal PRT annuity pricing can be obtained by all size plans.


Mark UnhochMark Unhoch is a partner in the annuity services practice at October Three Consulting.

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(Image: Diego M. Radzinschi/ALM)