Employers racing to offload pensions to insurers

The trend is a boon for the insurance business, but there are questions about protections for retirees and workers.

To the extent that traditional pension plans aren’t all but a thing of the past in the private sector, they soon may be.

Among companies that still have active defined-benefit plans on their books, 89% are planning to offload their pensions to insurance companies using a strategy called pension risk transfer, which puts workers and retirees into group annuities. That statistic comes from a recent survey commissioned by MetLife, which found that the companies planning to transfer their pension liabilities will do so within an average of about four years.

Last year was a record for pension-risk transfers, with 562 buyout contracts, representing $48.3 billion, up by 42% compared to levels in 2021, according to data from Limra. This year is on track to approach that figure, with $22.5 billion in contract buyouts during the first half of 2023, the group reported in August.

The ramp-up in employers’ exits from pension plans coincides with the improved financial health of their plans. Higher interest rates have helped give a boost to plans’ funded status, making them eligible for transfers to insurance companies, Limra assistant annuity research director Mark Paracer said in a statement earlier this year.

This year marks the first time in more than a decade that pensions of S&P 500 companies have, in aggregate, reached a funding ratio of over 100%. As of Tuesday, the funded ratio was 102.3%, according to data from Aon. That ratio had been less than 75% in mid-2012, shortly after Aon began tracking the pensions’ funded statuses.

The trend in pension risk transfers has been a boon for insurers, and the industry expects that to continue. But there are questions about how pension participants will be protected as they move out of plans covered by the Employee Retirement Income Security Act and into group annuities that are regulated by different states’ insurance commissions.

Numerous groups have brought that concern to the Department of Labor, including the AARP, the Consumer Federation of America and the Pension Rights Center.

“When insurance companies take over these liabilities, they are required to pay the same benefits … but retirees are scared,” said Karen Friedman, executive director of the Pension Rights Center. “There are a lot of ERISA protections that people lose in these transactions.”

So far, pension participants “have gotten what they’re supposed to get” in those transfers, but issues could arise on the level of spousal protections in those contracts and what could happen if records are inaccurate or missing, Friedman said. Further, the insurance guarantees vary by state, unlike the coverage pensions receive under the Pension Benefit Guaranty Corporation, she noted.

Pensions are protected against creditors, and it’s unclear whether the annuity transfers will afford the same protection, Friedman said.

Newer entrants to the insurance business add a level of uncertainty as well, she said. What happens in cases where benefits are miscalculated is another potential issue. “There are a lot of questions that need to be answered.”

Because of that, some groups are pressing the DOL to issue guidance for plan sponsors to negotiate for protections in group annuity contracts that are similar to those offered under ERISA, Friedman said.

“The U.S. pension risk transfer market has shown no signs of slowing as market activity continues to reach new levels,” Paula Cole, vice president at Nationwide Pension Risk Transfer, said in a statement provided by a company spokesperson. “Nationwide’s PRT sales are setting records too, ending 2022 with $1.3 billion in sales after finishing 2021 with sales of $481 million due to our competitive pricing and the breadth of industry knowledge across our team.”

In its report, MetLife noted that “macroeconomic forces — inflation, market volatility, rising interest rates and recessionary concerns — are continuing to drive de-risking activity, coupled with an increase in the number of retirees for these plans and favorable annuity buyout pricing.”

Additionally, pension liabilities are getting more attention from companies’ C-suite executives, who are becoming more involved in plan management, MetLife stated. That insurer’s recent survey included responses from 250 companies that have short- or long-term “de-risking goals” for their defined-benefit plans.