Navigating Pension Risk Transfers

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Navigating Pension Risk Transfers
A 2024 Pension Risk Transfer Industry Whitepaper by DIETRICH

Seizing Opportunities in a Dynamic Market

This whitepaper explores the evolving landscape of pension risk transfers (PRTs), covering not only the short-term trends from 2022-2024, but also the longer-term perspective of where the industry is going and the impact on plan sponsors, advisors and participants.

Multiple disparate factors impact PRTs, and while each PRT opportunity is unique to the plan and plan sponsor, this is a unique market environment and potentially a critical juncture for plan sponsors to act in the face of changing interest rates, improved equity, and the opportunities to settle liabilities at less than book value. As we enter 2024, challenges and opportunities arise, prompting need for action.

Perspective: The 2022/2023 PRT Market

We witnessed a seismic shift in the financial climate with a historic rise in interest rates in 2022. Simultaneously, equity markets experienced a noticeable drop from recent highs, significantly impacting plan assets. This dual-impact shift in the financial landscape set the stage for a transformative period as we entered 2023.

In 2023, markets rebounded dramatically. This, coupled with persistently higher interest rates, created a ‘perfect storm’ of opportunity to settle pension funds at or below book value. Higher interest rates and higher markets – and thus better-funded pension plans – rendered it more cost-effective for plan sponsors to settle pension liabilities due to the inverse relationship between annuity cost and interest rates. This was an unprecedented event not experienced in the past 20+ years of conducting PRTs. 

Predictably, a deluge of PRT requests were initiated under these favorable conditions. With the average PRT timeline taking 12-18 months from inception to close, there quickly became bottlenecks with insurance carriers.

Transition from 2023 to 2024

As we transitioned from 2023 into 2024, the dynamics of the pension risk transfer market underwent a notable evolution. During the latter part of 2023, particularly in Q3/Q4, the market experienced saturation, with carriers reaching full capacity. The consequence of this saturation was fewer insurance companies competing for opportunities, leading to a reset in pricing dynamics at the end of 2023.

What We Anticipate in 2024

As we enter 2024, we are seeing pent-up demand from 2023 and an initially robust PRT market. As always, uncertainties loom regarding the trajectory of interest rates and asset fluctuations. These anticipated changes, along with Pension Benefit Guaranty Corporation (PBGC) premiums continuing to climb, have prompted plan sponsors to expedite their approach. The dynamic nature of the market necessitates a nuanced understanding and proactive approach to seize opportunities and mitigate potential risks.

Urgency of Action

The urgency to act stems from the recognition that favorable market conditions may not persist indefinitely. The current juncture represents a unique alignment of performing assets and lower cost to settle liabilities, presenting a strategic window of opportunity. The call to action extends to plan sponsors and intermediaries, urging them to recognize the time-sensitive nature of the current environment and to strategically position themselves for optimal outcomes.

Timing Challenges & Considerations

Toward the close of 2023, uncertainties surfaced regarding the longevity of the favorable PRT environment. Despite a banner year for plan sponsors, with pension liabilities settled at or below book value, the unexpected capacity issues led to less-than-perfect pricing and settling delays, pushing some settlements into Q1 2024. While it is unknown if 2024 will incur these same capacity challenges, it is always prudent to begin the PRT process sooner rather than later in order to align your plan to take advantage of market conditions. 

Regulatory Dynamics

The regulatory landscape adds a layer of complexity to the decision-making process. The PBGC and its programs, influenced by post-COVID relief measures, introduce an additional layer of unpredictability. Plans, still adhering to pre-COVID relief methods, face potential challenges as the relief effects wane in 2024. The interplay between funding ratios and PBGC premiums comes under scrutiny, impacting plan sponsors despite the seemingly improved economic environment.

Innovation & Adaptability

It is worth noting IBM’s strategic reopening of their pension plan in 2023, illustrates both the adaptability required in response to changing market dynamics and a potential path forward for companies looking to protect their employees’ retirements. IBM’s decision to freeze its pension plan and subsequent de-risking strategies resulted in a pension plan overfunded by nearly $6 billion. While this direction was most likely a fiscally strategic maneuver, The company’s innovative approach of reopening the pension plan, coupled with the ending their 401(k) match, showcases adaptability and resilience in the face of change, providing insights and ideas for other plan sponsors.

The Path Forward

For plan sponsors and advisors, we want to re-emphasize the potential in this historic opportunity, coupled with the fleeting market variability, and urge a thorough analysis of your pension plan, assessment of the cost to settle, and making strategic moves as soon as possible. IBM exemplifies that change is not only possible but can be advantageous, showcasing a pathway to have a traditional pension without excessive risk. The role of a PRT expert advocating on your behalf is essential in navigating these changes and de-risking pension plans within the broader retirement landscape.

The trends in PRTs, from the historic rise in interest rates to the challenges and opportunities of 2023 and the uncertainties of 2024, underscore the need for proactive decision-making. Plan sponsors are encouraged to leverage the current environment, act strategically, and explore novel approaches to secure their businesses and protect their employees’ retirements. The dynamic nature of the markets requires a nuanced understanding and niche experience, plus timely action to optimize outcomes in this ever-evolving landscape.


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