Pension Buyout Puts Group Annuities In The Spotlight
December 17, 2014 by Linda Koco
MetLife has signed a $440 million pension buyout agreement with TRW, a subsidiary of TRW Holdings. It is one of several such deals that MetLife has closed over the last few months, Wayne Daniel, senior vice president-U.S. pensions for MetLife, said in a statement.
MetLife is one 10 or so insurance companies that provide services and products (including group annuities) that are at the heart of such transactions.
According to MetLife, the deal will provide pension benefits to 7,045 retirees and current beneficiaries in TRW’s defined benefit plan.
Called pension risk transfer, or PRT, agreements, pension buyouts are typically sought by companies that have underfunded defined benefit pension plans. The PRT shifts some or all of an employer’s pension obligations to a third party such as an insurance company.
The deals can be administration-only but many PRTs entail purchase of a group annuity from a carrier which then takes over the employer’s pension obligations. Deals involving plans from General Motors, Verizon and Motorola are notable examples in the past couple of years.
Why group annuities
The use of group annuities for PRT deals may puzzle some annuity professionals. Most people in the field who know of group annuities tend to associate the products with old-style self-managed defined benefit pension plans that were linked to a group annuity structure. But those plans declined with the rise of defined contribution plans, such as 401(k)s, so group annuities have been fading from the annuity landscape and the annuity conversation.
The market has changed in recent years, however. Due to the 2008 economic downturn and the slow recovery, many companies now have underfunded defined benefit plans that are creating cost pressures and exposure to risk. Some firms want to get out of the front line of the pension business altogether. As a result, demand for PRT solutions has increased.
In the fourth quarter of 2013, for example, there were 83 settlements representing a combined total of almost $2.4 billion, according to a survey by Hewitt EnnisKnupp, an Aon Company. “This was four times the amount of premium placed in any of the preceding three quarters of 2013” in the U.S., the researchers said.
For the full year of 2013, there 235 settlements representing a total premium of $3.8 billion, the report said. That figure lags the total for 2012, which was $35.3 billion, but 2012 was an exceptional year because it included jumbo deals from GM and Verizon.
That said, total premium for 2013 outpaced all years from 2005 to 2011, Hewitt EnnisKnupp reported.
Research from MetLife suggests this activity will continue. In an online survey of 228 defined benefit plan sponsors in late September and early October of this year, the carrier learned that 29 percent of plan sponsors are likely to consider a PRT option in the next two years.
That could represent significant dollars, since the plan sponsors polled were from Fortune 1000 companies as well as the next largest 2,000 companies by defined benefit plan size.
In other findings, 37 percent of the plan sponsors told MetLife’s researchers that pension plan liabilities have become a greater priority in the last year, and 26 percent said their plans’ funded status has become a greater priority.
Nearly half (47 percent) said they no longer want the risk, and nearly three-quarters (69 percent) indicated interest in a group annuity for long-term cost control.
Surprising?
Some advisors might find this strong plan sponsor interest in PRTs and group annuities to be surprising, since immediate annuities, which are the chassis for group annuities, are generally viewed as offering unattractive pricing due to the continuing low-interest rate environment.
Advisors holding that view are correct about the depressive impact that low rates have on the relative attractiveness of immediate annuities. Aon recognized as much in its June 2010 report on the pension takeover market. Due to the decline in interest rates and the financial crisis that emerged in late 2008, it said, the year 2009 was “very slow” for pension closeout deals using group annuities.
In fact, sales volume in 2009 was the second lowest in 10 years, down by over 70 percent from 2007 and 2008, which were then considered to be landmark years. Group annuity sales in each of those years came in at over $2 billion in annuity premium.
However, in today’s market, employers are still struggling with underfunded defined benefit plans, and some of them are concerned enough to pay insurers to take over the risk, despite the low rate environment.
