Pension transfers in vogue as expense grows, and companies shift to 401(k) plans

Employers are increasingly paying insurers to cover their pension liabilities

Dec 5, 2017 @ 2:00 pm

By Greg Iacurci

Employers are increasingly offloading their pension obligations as plan expenses increase, economic conditions improve and companies continue a pronounced shift toward 401(k) plans.

A pension buyout — not to be confused with a lump sum payout to employees — is one way companies have sought to offload the risk associated with their defined-benefit plans, which have become more difficult to manage amid increasing longevity and persistently low interest rates.

In such transactions, employers transfer their pension obligation to an insurance company by purchasing a group annuity contract for all or a portion of plan participants. The insurer makes monthly payments to participants, and relieves the employer of their associated pension liabilities.

Last year was the second-largest in history for single-premium pension buyouts, with a total $13.7 billion in transactions, according to the Limra Secure Retirement Institute, which tracks insurance data. It would have been the largest on record if massive buyouts in 2012 from Verizon and General Motors, which holds the record for the largest transaction to date, aren't factored in.

2017 is poised to be stronger yet, with sales likely to approach $20 billion, according to Limra.

"The marketplace has grown and continues to grow," said David Hinderstein, president of Strategic Retirement Group Inc., which specializes in retirement-plan consulting and advises employers on pension buyouts. "And it's not just the jumbos of Verizon and GM. It's small, mom-and-pop DB plans that were established decades ago."

Single-premium pension buyouts, 2000-16
Sales figures are in millions of dollars. *General Motors and Verizon completed large transactions in 2012.
Source: Limra Secure Retirement Institute

Pension plans have broadly fallen out of favor among employers as the retirement plan of choice. The number of DB plans peaked in 1983, at 175,000, and the number has steadily decreased, to below 45,000 today, according to the Department of Labor. Defined-contribution plans such as 401(k)s have instead curried favor, largely because employees shoulder much more of the risk.

But as employers have embraced 401(k)s, their pension obligations remain on the books, leading them to lessen associated risk through pension buyouts, as well as through other strategies such as offering lump sums to pension-plan participants.

General Motors, for example, reduced its pension obligations by $26 billion in 2012 through a combination of lump-sum offers and a group annuity contract with Prudential.


The expense of maintaining pensions is a primary driver of increased activity around pension-risk transfer. A trend of increasing lifespans means companies have to make more monthly payments to participants. Annual insurance premiums associated with DB plans have also swelled.

Employers make yearly payments — both a flat and variable rate — to the Pension Benefit Guaranty Corp., a federal agency, to insure against a company's future inability to pay pensioners. The flat, per-participant rate and variable rate, which applies to the amount a plan is underfunded, have roughly doubled and tripled over a decade, respectively. Both are set to increase more through 2019.

Annual PBGC premiums
Source: Pension Benefit Guaranty Corp.

Further, plan funding ratios, a measure of how a plan's assets relative to its obligations, have also improved since the financial crisis. That makes pension buyouts more attainable for employers since a plan has to be at least fully funded for an insurance company to accept the risk transfer, experts said.

Funding ratios dropped dramatically, from around 100% in August 2008 to 74.5% in February 2009, according to a Milliman analysis of the largest DB plans sponsored by U.S. public companies. They've since recovered to roughly 85%.

Corporate pension plan funding ratio
Source: Milliman 100 Pension Funding Index

Rock-bottom interest rates are also making it easier for companies to borrow to get their plans to a status of being fully funded, a strategy known as "borrowing to fund."

And if Republicans' sought-after cuts to the corporate tax rate are passed by their goal of Christmas this year, it could give companies more cash on hand to top up their pensions and execute a pension buyout, experts said.


Of course, seeing prominent companies like GM and Verizon do a pension-buyout deal leads to a sort of herd mentality among other employers, said Scott Kaplan, head of Prudential's pension risk transfer business.

"GM and Verizon were the shots heard round the world that really started the trend," Mr. Kaplan said.

Employers, especially larger ones, typically do these transactions for certain blocks of participants, such as active employees, those no longer employed but not yet taking benefits (known as "terminated vested" participants), and retirees receiving benefits, or subsets of these three categories, said Matthew Drinkwater, assistant vice president at LIMRA Secure Retirement Institute.

Employers pay an insurer to take over their pension liabilities. That payment is an amalgam of the total liabilities as well as a premium. An employer doing a pension buyout for a retiree population can typically expect to pay between 101% and 105% of the associated liabilities, Mr. Kaplan said.

Mr. Drinkwater put the potential for increased activity around pension buyouts into perspective: "There are trillions in liabilities out there still."

Graphics by Ellie Zhu


What do you think?

View comments

Recommended next

Upcoming event

Dec 05


ESG & Impact Forum

Thought leaders, investment strategists and practitioners will gather at the United Nations Headquarters to translate global ESG and impact investing perspectives into strategies that resonate with investors and produce desired outcomes.... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print