Employers offloaded pension liabilities at nearly record levels in 2017, a reflection of the fact that pension plans have become more costly to keep on the books, longevity has increased and 401(k) plans have grown more popular.
Rising interest rates and an incentive provided by the new tax law suggest even more employers may seek to reduce their pension liabilities in greater numbers in 2018.
Single-premium pension buyout sales swelled 68% in 2017 compared with the prior year, hitting $23 billion, according to the LIMRA Secure Retirement Institute, which tracks insurance data.
That's the second-largest annual total on record, ranking only behind 2012, which saw about $36 billion in deals. However, 2017 was markedly different — whereas two "jumbo" pension-risk-transfer deals from General Motors and Verizon drove most of the action in 2012, there weren't any such massive deals done last year.
"It was a very good year for pension-risk transfers despite not having jumbo deals," said Eugene Noble, a research analyst at LIMRA. "We've never seen sales this high without jumbo deals occurring."
Single-premium pension buyouts are the most popular type of pension risk transfer. Employers transfer their pension obligations to an insurance company by purchasing a group annuity contract for all or a portion of the plan participants. Such deals have been elevated since 2012.
Annual premiums that pension plan sponsors pay to the Pension Benefit Guaranty Corp., a federal agency, have swelled since 2012, making it more expensive to keep pension liabilities on their books. Increasing life spans also make pensions more expensive for employers, since they have to pay out fixed pension benefits to participants over a longer time period.
401(k) plans have become a popular avenue to provide retirement benefits to employees, since the investment and longevity risks are shouldered by the participants, not the plan sponsor.
"These pension liabilities are becoming extremely expensive to maintain, so they're looking for a de-risking avenue," Mr. Noble said.
Rising interest rates will likely improve pension funding ratios in the coming years, according to LIMRA. This makes it likely that more plan sponsors will consider pension risk transfers, LIMRA said, since funding for the block of liabilities must be at 100% to do a transaction. Economists are predicting the Federal Reserve will raise interest rates three or four times in 2018.
Further, a new lower corporate tax rate could provide a boost to pension transfer deals. It makes funding pension plans sooner more appealing, which many try to do before completing a risk transfer anyway.
There are risks to completing such transactions. MetLife Inc., for example, has been in the spotlight recently for failing to pay benefits to thousands of pension clients. It had lost track of these pensioners, which the company assumed responsibility for due to pension risk transfers.