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Pension Risk Transfer: Annuities Getting Increased Attention

As finance executives consider the ultimate disposition of their companies’ defined benefit (DB) plans, risk transfer in the form of annuity purchases has become a solution that more companies are utilizing. This is among the trends seen in the sixth annual survey that CFO Research has conducted with Prudential Financial, Inc., on finance executives’ plans for their companies’ retirement and benefits programs.

Risk (or liability) transfer involves the use of third parties to take over responsibility for all or a portion of a company’s pension plan obligations, including asset management and payouts. Typically the transfer is accomplished through the purchase of an annuity from an insurance company.

Within the past three years, in particular, several high-profile companies have attracted attention because of the size of the benefits obligations that they transferred. However, increasingly companies are starting to recognize that size itself does not have to be the determining factor, and the insurance industry has seen a sharp increase in the number of risk transfer transactions designed for smaller, more narrowly defined populations of DB plan participants.

A large increase is seen in those who said they would be “very likely” to purchase an annuity within the next two years.

In our survey, the number of respondents reporting that their companies have already executed liability transfer transactions has risen from 3% in 2010 to 15% this year. Furthermore, a large increase (from 5% in 2010 to 23% this year) is also seen in those who said they would be “very likely” to purchase an annuity within the next two years. Another 24% say that they are “somewhat likely” to do so. (See Figure 1.)

Within the next two years, how likely is your company to purchase an annuity for a portion of DB plan participants? 2016 Answer

The rising interest in liability transfer serves as motivation for some companies to close their DB funding gaps—that is, the gap between projected liabilities and the level of assets required to cover those liabilities. The more fully a plan is funded, the easier it becomes for an employer to manage its DB plan risk, and the more options it has open to it—including, in some cases, liability transfer.

Companies that have employed risk transfer transactions in the past appear to be comfortable with their decision. In fact, our survey found that interest in annuities spikes among the companies that already are experienced with them: 73% of those who indicated that their companies have purchased an annuity for a portion of plan participants say they are likely to transfer additional liabilities to a third-party insurer sometime over the next two years.

With nearly four in ten survey respondents (38%) acknowledging that liability transfer could be helpful in enabling them to focus more on their core business, rather than on pension plan management, it appears that finance executives are building a growing recognition of the value that a thoughtfully planned and executed transfer strategy can deliver.

 

Research Sponsor's Statement

“The survey results reflect the activity in the marketplace. I think we’d be hard pressed to find a board room in large and mid-size firms where they are not discussing de-risking their pension obligations. The survey results indicate not only a large jump since 2010 in the number of employers who have already completed an annuity buyout, but also in the number who say they are very likely to purchase an annuity in the next two years.”

Scott Kaplan
Senior Vice President, Head of Pension Risk Transfer

About the Survey 

This year marks the sixth annual survey that CFO Research has conducted with Prudential Financial, Inc. The surveys provide insights into finance executives’ current thinking on their companies’ retirement and benefits programs. This year’s results are based on survey responses of 180 finance executives, most of whom (78%) work at large U.S. companies with more than $1 billion in annual revenues. All of the companies in the survey also have defined benefit (DB) plans with more than $250 million in assets; 31% have between $1 billion and $5 billion in assets, and an additional 31% have more than $5 billion in assets.

 

 

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