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Costs Weigh Heavily for Pension Risk Transfer Decisions

Overall DB plan costs, costs from changing mortality assumptions and PBGC premium hikes are all factors plan sponsors take into consideration when deciding whether to implement a pension risk transfer.

By Rebecca Moore editors@strategic-i.com | August 16, 2017

A study confirms that cost is the main factor driving corporations to implement a pension risk transfer by purchasing an annuity from an insurance company.

One-third of respondent to a survey conducted by CFO Research in cooperation with Prudential Financial chose each of the following factors: Desire to manage the total costs of the organization’s pension plan; desire to mitigate the impact of changing actuarial mortality assumptions, including potential future changes; and desire to mitigate the impact of rising Pension Benefit Guaranty Corporation (PBGC) premiums, including potential future increases.

“Desire to reduce the pension plan’s asset-related volatility” was chosen by 31% of respondents, while “desire to focus the organization on its core business (rather than on pension issues)” and “desire to reduce the number of smaller-benefit payments being made” were each chosen by 25% of respondents.

Seventy-two percent of organizations that have already shifted some defined benefit (DB) plan liability to an insurer via a group annuity purchase indicated they were likely to shift additional liabilities in the future.

Eighty-five percent believe their decision to engage in a pension risk transfer helps them keep their benefits promise to employees and offers employees greater retirement security in the long run. Eighty one percent either agreed or strongly agreed to the statement, “I believe that my organization’s pension beneficiaries who have been affected by a group annuity purchase are content to receive their pension payments from an insurance company.”

Among those who have not completed a pension risk transfer, only 20% said it is likely they will do so in the next two years. However, 28% say the increase in interest rates from a year ago (and the prospect of further increases) make it much more likely to implement a pension risk transfer, while 35% said the same about the recent rise in PBGC premiums (and the prospect of further increases) and 33% said the same about the recent change in actuarial mortality assumptions (and the prospect of further changes).

The study also shows how tax and regulatory proposals from the current administration and Congress could serve as additional motivators for considering such a move. Among respondents who have not yet completed a group annuity purchase, 55% agreed that lowering the corporate tax rate in 2017 would “very likely” motivate their companies to increase pension plan funding—often a precursor to purchasing a group annuity, according to Prudential—in the next year, while 40% agreed that lower taxes would lead them to execute a full or partial pension liability transfer.

Full results of the survey of 80 senior finance executives at companies with traditional pensions can be viewed here.