Preparing for a Manageable Future€¦ · Prepping Pension Plans for the Future Options on the...

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Advertising Supplement

PENSION

RISKManagementStrategiesPreparing for a Manageable Future

Athene USA 7700 Mills Civic Parkway West Des Moines, IA 50266 Sean Brennan SVP, Head of Pension Risk [email protected] www.athene.com

MassMutual100 Bright Meadow Blvd.En�eld, CT 06082 Neil DrzewieckiHead of Institutional [email protected]://institutional.massmutual.com

MetLife200 Park AvenueNew York, NY 10166Asif MohamedDirector, U.S. [email protected]/pensionrisktransfer

NISA Investment Advisors, LLC101 South Hanley Road, Suite 1700St. Louis, MO 63105 Gregory J. Yess, CPAManaging Director, Client [email protected]

Prudential280 Trumbull Street Hartford, CT 06103 Scott Gaul, FSAHead of Sales and Strategic Relationships860.534.4263scott.gaul@prudential.comwww.pensionrisk.prudential.com

This special advertising supplement is not created, written or produced by the editors of Pensions & Investments and does not represent the views or opinions of the publication or its parent company, Crain Communications Inc.

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Contents

Pension Risk Management Strategies 3


4Prepping Pension Plans for the FutureOptions on the table include hibernation, termination and risk transfer

6Know Today’s Risk for Tomorrow’s Decisions

10The Tortoise and the Hare Plan sponsors opting for quick wins are organizing annuity lift-outs

12Success Is in the PreparationFrom data cleansing to �duciary considerations, pension risk transfers require huge attention to detail

September 2018

PS003_PI_20180528.pdf RunDate: 09/03/18 Pension Risk Stategies Supp 8 x 10.875 Color: 4/CPS002_PI_20180528.pdf RunDate: 09/03/18 Pension Risk Stategies Supp 8 x 10.875 Color: 4/C

$310 Billion in Fixed Income, Equities, and Derivatives NotionalUnder Management1

Over $1 Trillion Total Liabilities of our Clients

An Industry Pioneer of LDI Solutions

www.nisa.com

1NISA managed $180 billion in fi xed income and equity and $130 billion in derivatives notional as of 6/30/18.

This is not a recommendation, o�er or solicitation to purchase or sell any secruities. It is not, and should not be regardedas, investment advice or as a recommendation regarding a course of action. All investments entail risk including loss ofprincipal; derivatives investments could lose more than the amount invested. NISA Investment Advisors, LLC is aregistered investment adviser. For more information, contact Greg Yess, Managing Director, Client Services at 314.721.1900.

© 2018 NISA Investment Advisors, LLC.

Let NISA tailor a solution that fits your plan’s individual needs.

Athene USA 7700 Mills Civic Parkway West Des Moines, IA 50266 Sean Brennan SVP, Head of Pension Risk [email protected] www.athene.com

MassMutual100 Bright Meadow Blvd.En�eld, CT 06082 Neil DrzewieckiHead of Institutional [email protected]://institutional.massmutual.com

MetLife200 Park AvenueNew York, NY 10166Asif MohamedDirector, U.S. [email protected]/pensionrisktransfer

NISA Investment Advisors, LLC101 South Hanley Road, Suite 1700St. Louis, MO 63105 Gregory J. Yess, CPAManaging Director, Client [email protected]

Prudential280 Trumbull Street Hartford, CT 06103 Scott Gaul, FSAHead of Sales and Strategic Relationships860.534.4263scott.gaul@prudential.comwww.pensionrisk.prudential.com

This special advertising supplement is not created, written or produced by the editors of Pensions & Investments and does not represent the views or opinions of the publication or its parent company, Crain Communications Inc.

Sponsors

Contents



4Prepping Pension Plans for the FutureOptions on the table include hibernation, termination and risk transfer

6Know Today’s Risk for Tomorrow’s Decisions

10The Tortoise and the Hare Plan sponsors opting for quick wins are organizing annuity lift-outs

12Success Is in the PreparationFrom data cleansing to �duciary considerations, pension risk transfers require huge attention to detail

September 2018


Companies know that their de�ned bene�t plans are an endangered spe-

cies, with no new plans being launched and open plans being closed, frozen or otherwise derisked. So today the focus is on preparing for the future by proactively man-aging the risks associated with the plan.

Plan sponsors have a number of tools at their disposal to derisk their pension plans, including soft and hard freezes, and pursuing an asset allocation strategy, such as immunization, that seeks to stabilize the funded ratio.

“Then you move through to actions that actually take risk out of the plan and transfer that risk to a third party,” said Wayne Daniel, senior vice president and head of U.S. pen-sions at MetLife. Among these options are transferring the liabilities to an insurer and paying a lump sum to terminated vested employees.

“The U.S. de�ned bene�t market is a $3 trillion runo� portfolio,” Daniel said. “Part of that runo� will involve plan sponsors hand-ing over responsibility for those bene�t payments to insurers. If market dynamics continue their current course, it is expected

that a signi�cant portion of these liabilities will �ow through the pension risk transfer pipeline over the next decade or so.”

That said, the �ow of funds out of pen-sion plans isn’t a done deal. “Hibernate vs. terminate continues to be a regular conversation for us,” said Ari Jacobs, senior partner and global retirement solutions leader at Aon.

“When plan sponsors evaluate the eco-nomics and operational bene�ts of these two approaches, they ask, ‘What is best for us?’” said Sean Brennan, head of pension risk transfer at Athene. “Even so, I would be very surprised if a frozen plan choosing hibernation doesn’t �nd some economic bene�t from transferring at least a portion of the liability o� the balance sheet.”

Liability-driven investing, better known as LDI, continues to be the strategy of choice for the portion of plans not being transferred, with the vast majority of corpo-rate DB plans using a variety of techniques to match assets to liabilities. Changes in asset allocations tell that story.

“At the turn of the century, about two-thirds of pension plan assets were held in

publicly traded equities,” said Daniel. “Fixed income, which was less than one-third, is now 42% of pension assets.”

The bigger conversation, though, is often around pension risk transfer options.

Daniel said he expects pension risk transfer volume in 2018 to top the $23 billion transacted in 2017. However, even factoring in the $6 billion in assets that FedEx Corp. transferred to MetLife in May, he doesn’t expect volume to reach $40 billion, a common 2018 estimate, given that between $10 billion and $15 billion had already been completed at mid-year. “The market is lumpy,” he said.

“We don’t expect the pension settle-ment market to get its next leg up until about 2020, with this year and next staying �at at about $25 billion in transactions each year,” said Glenn O’Brien, managing director and head of U.S. market for Prudential’s pension risk transfer business.

Changing MarketThe composition of the pension risk transfer market has changed as it has grown. Before 2012, most group annuity purchases were to

Prepping Pension Plans for the Future


Options on the table include hibernation, termination and risk transfer

4 Pension Risk Management Strategies

terminate small plans. Today, most growth comes from lift-outs of a portion of plan assets, often either current retirees or termi-nated vested employees.

The number of small-plan terminations continues apace, though. “We do see small pension plans opting for annuity buyouts, possibly because they can get more attrac-tive quotes from insurance providers,” said Cheryl Hanson, director of client services at NISA Investment Advisors.

For larger plans, termination isn’t always an option.

“Sometimes we hear a plan sponsor with a $5 billion plan say, ‘We can fully termi-nate and get rid of this plan,’” said David Eichhorn, president and head of invest-ment strategies at NISA. “Then I would ask whether that is even practical given the market today.”

What some plans are doing is multiple rounds of lump-sum windows and retiree annuity transactions.

“This isn’t a new pattern,” said Aon’s Ja-cobs. “Instead, it is more about transacting what is appropriate in one year and decid-ing whether there are new opportunities

due to items like changes in funded status, interest rate movements or new accounting standards.”

According to MetLife’s Pension Risk Transfer Poll, most plan sponsors expect to tranche their derisking activity and are not looking to do a full-plan termination.

The most common population that plan sponsors are looking to transfer are retirees, and Daniel said that it is no surprise that these transactions continue to dominate the marketplace.

“Only 22% of those surveyed suggested that they would seek a full buyout, but they also indicated that this would be a multiyear journey with a number of strategic events along the way,” Daniel said.

“At some point, this may lead to a conversation about termination, but really it’s more about taking advantage of the opportunities that the markets o�er,” he continued.

A Question of TimingNot all insurers agree that putting o� the termination conversation to continue down an LDI or hibernation path makes sense.

“While plans are chipping away at their liabilities through small-balance transac-tions and lump sums for the deferred population, they are also loading up on cor-porate credit at a really late moment in the economic cycle,” said Prudential’s O’Brien.

Under any LDI or hibernation scenario, this represents investment risk that could cause funding-volatility issues in certain market environments. “Shouldn’t we just divest ourselves of this functioning, not-for-pro�t �xed annuities business?” O’Brien asked.

O’Brien said he thinks that the focus of plan sponsors has shifted somewhat from funding-volatility risk to thinking about cost pressures, and that this has been leading to the multiple rounds of annuity purchases.

Others take the view that plan sponsors have been opting for these carve-o� deals because there’s no need to hive o� huge chunks of the plan. “I’d like to think that one reason that larger annuity deals haven’t been prevalent is because plans are able to handle the risks internally,” said NISA’s Eichhorn.

For some it’s just a matter of time. “I see very few plan sponsors looking to maintain their plans in perpetuity,” said Brennan at Athene. “And I would be surprised if many maintain their entire plan.”

He suggested that the complexity and optionality associated with liabilities makes it attractive to transfer at least some li-abilities o� balance sheets. Holding enough capital to guard against that optionality is expensive, as is maintaining the sta� and external support structure to manage those risks.

Insurers also aren’t always willing to take all types of bene�ciaries. Neil Drzewiecki, vice president at MassMutual, pointed to the large population of younger, terminated employees as one population group that is somewhat underserved in the pension risk transfer market.

“In the future, we expect that there will be more solutions available from insurers in terms of this population,” he said.

“Cost has always been a major factor in pension plan management,” said Aon’s Jacobs. “But some strategies are based on balance-sheet reduction.” He said small-balance transfers provide cost reduction, while also having an e�ect, albeit often small, on the balance sheet.



continued on page 14



Companies know that their de�ned bene�t plans are an endangered spe-

cies, with no new plans being launched and open plans being closed, frozen or otherwise derisked. So today the focus is on preparing for the future by proactively man-aging the risks associated with the plan.

Plan sponsors have a number of tools at their disposal to derisk their pension plans, including soft and hard freezes, and pursuing an asset allocation strategy, such as immunization, that seeks to stabilize the funded ratio.

“Then you move through to actions that actually take risk out of the plan and transfer that risk to a third party,” said Wayne Daniel, senior vice president and head of U.S. pen-sions at MetLife. Among these options are transferring the liabilities to an insurer and paying a lump sum to terminated vested employees.

“The U.S. de�ned bene�t market is a $3 trillion runo� portfolio,” Daniel said. “Part of that runo� will involve plan sponsors hand-ing over responsibility for those bene�t payments to insurers. If market dynamics continue their current course, it is expected

that a signi�cant portion of these liabilities will �ow through the pension risk transfer pipeline over the next decade or so.”

That said, the �ow of funds out of pen-sion plans isn’t a done deal. “Hibernate vs. terminate continues to be a regular conversation for us,” said Ari Jacobs, senior partner and global retirement solutions leader at Aon.

“When plan sponsors evaluate the eco-nomics and operational bene�ts of these two approaches, they ask, ‘What is best for us?’” said Sean Brennan, head of pension risk transfer at Athene. “Even so, I would be very surprised if a frozen plan choosing hibernation doesn’t �nd some economic bene�t from transferring at least a portion of the liability o� the balance sheet.”

Liability-driven investing, better known as LDI, continues to be the strategy of choice for the portion of plans not being transferred, with the vast majority of corpo-rate DB plans using a variety of techniques to match assets to liabilities. Changes in asset allocations tell that story.

“At the turn of the century, about two-thirds of pension plan assets were held in

publicly traded equities,” said Daniel. “Fixed income, which was less than one-third, is now 42% of pension assets.”

The bigger conversation, though, is often around pension risk transfer options.

Daniel said he expects pension risk transfer volume in 2018 to top the $23 billion transacted in 2017. However, even factoring in the $6 billion in assets that FedEx Corp. transferred to MetLife in May, he doesn’t expect volume to reach $40 billion, a common 2018 estimate, given that between $10 billion and $15 billion had already been completed at mid-year. “The market is lumpy,” he said.

“We don’t expect the pension settle-ment market to get its next leg up until about 2020, with this year and next staying �at at about $25 billion in transactions each year,” said Glenn O’Brien, managing director and head of U.S. market for Prudential’s pension risk transfer business.

Changing MarketThe composition of the pension risk transfer market has changed as it has grown. Before 2012, most group annuity purchases were to

Prepping Pension Plans for the Future


Options on the table include hibernation, termination and risk transfer


terminate small plans. Today, most growth comes from lift-outs of a portion of plan assets, often either current retirees or termi-nated vested employees.

The number of small-plan terminations continues apace, though. “We do see small pension plans opting for annuity buyouts, possibly because they can get more attrac-tive quotes from insurance providers,” said Cheryl Hanson, director of client services at NISA Investment Advisors.

For larger plans, termination isn’t always an option.

“Sometimes we hear a plan sponsor with a $5 billion plan say, ‘We can fully termi-nate and get rid of this plan,’” said David Eichhorn, president and head of invest-ment strategies at NISA. “Then I would ask whether that is even practical given the market today.”

What some plans are doing is multiple rounds of lump-sum windows and retiree annuity transactions.

“This isn’t a new pattern,” said Aon’s Ja-cobs. “Instead, it is more about transacting what is appropriate in one year and decid-ing whether there are new opportunities

due to items like changes in funded status, interest rate movements or new accounting standards.”

According to MetLife’s Pension Risk Transfer Poll, most plan sponsors expect to tranche their derisking activity and are not looking to do a full-plan termination.

The most common population that plan sponsors are looking to transfer are retirees, and Daniel said that it is no surprise that these transactions continue to dominate the marketplace.

“Only 22% of those surveyed suggested that they would seek a full buyout, but they also indicated that this would be a multiyear journey with a number of strategic events along the way,” Daniel said.

“At some point, this may lead to a conversation about termination, but really it’s more about taking advantage of the opportunities that the markets o�er,” he continued.

A Question of TimingNot all insurers agree that putting o� the termination conversation to continue down an LDI or hibernation path makes sense.

“While plans are chipping away at their liabilities through small-balance transac-tions and lump sums for the deferred population, they are also loading up on cor-porate credit at a really late moment in the economic cycle,” said Prudential’s O’Brien.

Under any LDI or hibernation scenario, this represents investment risk that could cause funding-volatility issues in certain market environments. “Shouldn’t we just divest ourselves of this functioning, not-for-pro�t �xed annuities business?” O’Brien asked.

O’Brien said he thinks that the focus of plan sponsors has shifted somewhat from funding-volatility risk to thinking about cost pressures, and that this has been leading to the multiple rounds of annuity purchases.

Others take the view that plan sponsors have been opting for these carve-o� deals because there’s no need to hive o� huge chunks of the plan. “I’d like to think that one reason that larger annuity deals haven’t been prevalent is because plans are able to handle the risks internally,” said NISA’s Eichhorn.

For some it’s just a matter of time. “I see very few plan sponsors looking to maintain their plans in perpetuity,” said Brennan at Athene. “And I would be surprised if many maintain their entire plan.”

He suggested that the complexity and optionality associated with liabilities makes it attractive to transfer at least some li-abilities o� balance sheets. Holding enough capital to guard against that optionality is expensive, as is maintaining the sta� and external support structure to manage those risks.

Insurers also aren’t always willing to take all types of bene�ciaries. Neil Drzewiecki, vice president at MassMutual, pointed to the large population of younger, terminated employees as one population group that is somewhat underserved in the pension risk transfer market.

“In the future, we expect that there will be more solutions available from insurers in terms of this population,” he said.

“Cost has always been a major factor in pension plan management,” said Aon’s Jacobs. “But some strategies are based on balance-sheet reduction.” He said small-balance transfers provide cost reduction, while also having an e�ect, albeit often small, on the balance sheet.







Some pension risks are obvious. Others are less obvious.For plan sponsors to understand how

to approach the future of their corporate de�ned bene�t plans, they need to have a very clear picture of the current risks the plan is taking.

Despite several years of positive market performance, corporate DB pension funds by and large aren’t yet fully funded. The Mil-liman 100 Pension Funding index, covering the 100 largest DB pension funds of publicly traded companies, was 92.8% at the end of June, well above the 87.6% level at the beginning of the year.

While certainly that is good news, it needs to be seen in context. The participant base of corporate DB plans is aging rapidly, with current retirees often comprising 50% of the total liabilities of a plan. This impor-tant statistic implies that it will be di�cult to close any funding gaps that a plan has now, or that open up in the future, simply by the investment performance of the portfolio.

Prudential undertook an exercise to project funded status for an average corpo-

rate pension plan that is 84% funded with a 4.6% expected return on assets for the next four years with no contributions. With retir-ees representing 50% of plan liabilities, the median funded status would have declined to 76%, largely because of the impact of bene�t payments. Key Metric Funded status volatility is the key risk metric that most pension plans watch carefully.

“Plan sponsors need to ask themselves how much volatility are they comfortable with and how can a glidepath help reduce that over time,” said David Eichhorn, presi-dent and head of investment strategies at NISA Investment Advisors.

According to Eichhorn, wherever a plan sponsor wants to go with their plan, they need to start by focusing on economic risks such as funded status volatility, an issue that has popped up as funding has improved.

“With recent equity market performance and tax reform, we’ve seen plan sponsors making contributions into their plans,

signi�cantly improving their funding ratios,” said Neil Drzewiecki, vice president at MassMutual. “This gives plans more options going forward.”

While funded status volatility encom-passes many plan risks, it doesn’t provide insight into all the corporate risks associated with a DB plan.

Broadly, companies that sponsor de�ned bene�t pension plans face three categories of risk: those relating to the investments, or the asset side of the balance sheet; the liability risk; and the overall business risk associated with managing a plan.

Investment risks include asset alloca-tion issues and the need to meet the return goals for the plan. Mortality, underfunding, early retirement and asset-liability matching are among the liability risks.

Business risk is a broader category, en-compassing plan governance, the account-ing impact of the plan on the sponsoring company, �duciary risk and litigation risk, just to name a few.

Pension plans have always faced regula-


AD

continued on page 8

for Tomorrow’s DecisionsKnow Today’s Risk



Some pension risks are obvious. Others are less obvious.For plan sponsors to understand how

to approach the future of their corporate de�ned bene�t plans, they need to have a very clear picture of the current risks the plan is taking.

Despite several years of positive market performance, corporate DB pension funds by and large aren’t yet fully funded. The Mil-liman 100 Pension Funding index, covering the 100 largest DB pension funds of publicly traded companies, was 92.8% at the end of June, well above the 87.6% level at the beginning of the year.

While certainly that is good news, it needs to be seen in context. The participant base of corporate DB plans is aging rapidly, with current retirees often comprising 50% of the total liabilities of a plan. This impor-tant statistic implies that it will be di�cult to close any funding gaps that a plan has now, or that open up in the future, simply by the investment performance of the portfolio.

Prudential undertook an exercise to project funded status for an average corpo-

rate pension plan that is 84% funded with a 4.6% expected return on assets for the next four years with no contributions. With retir-ees representing 50% of plan liabilities, the median funded status would have declined to 76%, largely because of the impact of bene�t payments. Key Metric Funded status volatility is the key risk metric that most pension plans watch carefully.

“Plan sponsors need to ask themselves how much volatility are they comfortable with and how can a glidepath help reduce that over time,” said David Eichhorn, presi-dent and head of investment strategies at NISA Investment Advisors.

According to Eichhorn, wherever a plan sponsor wants to go with their plan, they need to start by focusing on economic risks such as funded status volatility, an issue that has popped up as funding has improved.

“With recent equity market performance and tax reform, we’ve seen plan sponsors making contributions into their plans,

signi�cantly improving their funding ratios,” said Neil Drzewiecki, vice president at MassMutual. “This gives plans more options going forward.”

While funded status volatility encom-passes many plan risks, it doesn’t provide insight into all the corporate risks associated with a DB plan.

Broadly, companies that sponsor de�ned bene�t pension plans face three categories of risk: those relating to the investments, or the asset side of the balance sheet; the liability risk; and the overall business risk associated with managing a plan.

Investment risks include asset alloca-tion issues and the need to meet the return goals for the plan. Mortality, underfunding, early retirement and asset-liability matching are among the liability risks.

Business risk is a broader category, en-compassing plan governance, the account-ing impact of the plan on the sponsoring company, �duciary risk and litigation risk, just to name a few.

Pension plans have always faced regula-


AD

continued on page 8

for Tomorrow’s DecisionsKnow Today’s Risk

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tory risk issues. “Given that pensions are �lled with regulatory challenges, sponsors also face what I call agency risk,” said Ari Jacobs, senior partner and global retirement solu-tions leader at Aon. “Fewer and fewer people at the company understand the pension plan, whether that be data, administrative issues or even investment ones.” A shrinking knowledge base can be a problem.

“Interest rate risk is the least desirable risk for pension plans,” Eichhorn said. “It’s uncompensated, unlike equity risk, so we try to get plan sponsors focused on address-ing interest rate risk more quickly.”

It’s also an area of the market where certain changes can produce unanticipated challenges.

“An inverted yield curve is an interesting potential risk,” Jacobs said. “It’s economi-cally di�erent and will mean that there will be an increased interest in watching rates over the next few years, especially for cash balance plans that may be more sensitive to the yield curve.”

Mitigating Risk The next step in the risk equation is mitiga-tion. For each of these areas of risk, plan sponsors must either ensure that it o�ers a signi�cant chance of return or look for ways to balance the risk equation through mitigation. In equity markets recently, this equation has paid o� to the extent that returns have been positive, even if their contribution to mitigating overall risk is small.

Mitigation e�orts such as liability-driven investing and hibernation seek to limit pen-sion risk to within agreed upon boundar-ies. Pension risk transfers aim to eliminate certain risks altogether.

Increasingly there are reports that plans — including larger ones — are contemplat-ing termination. Typically, termination has been the preserve of the small- or medium-sized plan, where the insurance market has had the capacity to swallow the entire deal.

“We see a decent number of companies that suggest their goal is to terminate the plan completely,” Drzewiecki said.

“We �nd that plan sponsors and employers really don’t want to spend too much time and energy managing the risks associated with a pension plan,” said Wayne Daniel, senior vice president and head of

U.S. pensions at MetLife. For example, pool-ing longevity risk is not a core competency for most companies.

For plans that are able to gain a 360-de-gree view of the pension plan, many come to the conclusion that providing this bene�t is indeed not a core competency and some-times very far outside their area of expertise.

“A pension plan is simply a �xed annuity business,” said Glenn O’Brien, manag-ing director and head of U.S. market for Prudential’s pension risk transfer business. “Companies should think of the pension plan as an operating company, albeit one that can produce some signi�cant capital calls and cannot produce a pro�t.”

The question is whether a company

wants to be in the insurance business, with its signi�cant credit and equity risks. “With the focus on small balances in pension risk transfer, companies are missing the larger discipline around divesting businesses that they don’t want to be in,” he said.

In strategic planning, company ex-ecutives often ask how best to focus the company’s resources, time and people around core businesses. “After that analysis, some companies choose to exit businesses that are not core to the company mission,” O’Brien said. “At Prudential, our example is the property and casualty business, which we exited two decades ago.” He pointed out that the P&C business was pro�table, but not core to Prudential’s future.✓

Continued from page 6


A Race Against Time


AD

Wondering why so many companies are in the news with pension contributions? The answer is simple: timing and taxes.

Even with the good news on funding, plan sponsors looking to make meaningful reductions in pension risk know that the �rst step is full funding.

“Part of the reason why we haven’t seen a signi�cant increase in full-plan termina-tions is around a�ordability,” said Wayne Daniel, senior vice president and head of U.S. pensions at MetLife. “Since 2000, there have been only very brief periods when the plans of the S&P 500 have been fully funded.”

Even with the additional contributions that many companies have made, reductions on investment returns and increases in Pension Bene�t Guaranty Corp. premiums mean that funding is still under considerable pressure. “To a�ord a full-plan termination, the plan sponsor would have to make a signi�cant payment,” Daniel said.

“We’ve already seen some announcements of accelerated contributions because of the higher deductibility of those contributions attributable to 2017,” said Sean Brennan, head of pension risk transfer at Athene. These contributions can be made until Sept. 15, 2018.

“What we see is plans in better-funded positions, and historically, better-funded plans have been more likely to approach pension risk transfer,” he said.

Others take the idea even further. “Tax reform and the opportunity to fund the pen-sion plan at the 2017 35% tax rate, rather than the new 21% rate is driving activity,” said Ari Jacobs, senior partner and global retirement solutions leader at Aon.

“It has led organizations to think about whether or not they should terminate the entire plan, rather than simply look for lift-outs,” he continued.

Cash contributions to corporate pension plans topped $34 billion in 2017 and, ac-cording to Securities and Exchange Commission �lings for S&P 500 companies, were set to clock in at $32 billion this year.

It isn’t just the tax incentive that is prompting this move to shore up plan funding. It’s also the fast-rising PBGC premiums, which can be onerous depending on a plan’s funded status.

“We’ve seen increased interest from our client base in taking advantage of tax reform by making contributions by Sept. 15,” said Cheryl Hanson, director of client services at NISA Investment Advisors. Alongside some clients that have made substantial contribu-tions this year, she also pointed to other clients that are looking to reduce PBGC premi-ums. Better funded plans pay less in variable-rate premiums.



tory risk issues. “Given that pensions are �lled with regulatory challenges, sponsors also face what I call agency risk,” said Ari Jacobs, senior partner and global retirement solu-tions leader at Aon. “Fewer and fewer people at the company understand the pension plan, whether that be data, administrative issues or even investment ones.” A shrinking knowledge base can be a problem.

“Interest rate risk is the least desirable risk for pension plans,” Eichhorn said. “It’s uncompensated, unlike equity risk, so we try to get plan sponsors focused on address-ing interest rate risk more quickly.”

It’s also an area of the market where certain changes can produce unanticipated challenges.

“An inverted yield curve is an interesting potential risk,” Jacobs said. “It’s economi-cally di�erent and will mean that there will be an increased interest in watching rates over the next few years, especially for cash balance plans that may be more sensitive to the yield curve.”

Mitigating Risk The next step in the risk equation is mitiga-tion. For each of these areas of risk, plan sponsors must either ensure that it o�ers a signi�cant chance of return or look for ways to balance the risk equation through mitigation. In equity markets recently, this equation has paid o� to the extent that returns have been positive, even if their contribution to mitigating overall risk is small.

Mitigation e�orts such as liability-driven investing and hibernation seek to limit pen-sion risk to within agreed upon boundar-ies. Pension risk transfers aim to eliminate certain risks altogether.

Increasingly there are reports that plans — including larger ones — are contemplat-ing termination. Typically, termination has been the preserve of the small- or medium-sized plan, where the insurance market has had the capacity to swallow the entire deal.

“We see a decent number of companies that suggest their goal is to terminate the plan completely,” Drzewiecki said.

“We �nd that plan sponsors and employers really don’t want to spend too much time and energy managing the risks associated with a pension plan,” said Wayne Daniel, senior vice president and head of

U.S. pensions at MetLife. For example, pool-ing longevity risk is not a core competency for most companies.

For plans that are able to gain a 360-de-gree view of the pension plan, many come to the conclusion that providing this bene�t is indeed not a core competency and some-times very far outside their area of expertise.

“A pension plan is simply a �xed annuity business,” said Glenn O’Brien, manag-ing director and head of U.S. market for Prudential’s pension risk transfer business. “Companies should think of the pension plan as an operating company, albeit one that can produce some signi�cant capital calls and cannot produce a pro�t.”

The question is whether a company

wants to be in the insurance business, with its signi�cant credit and equity risks. “With the focus on small balances in pension risk transfer, companies are missing the larger discipline around divesting businesses that they don’t want to be in,” he said.

In strategic planning, company ex-ecutives often ask how best to focus the company’s resources, time and people around core businesses. “After that analysis, some companies choose to exit businesses that are not core to the company mission,” O’Brien said. “At Prudential, our example is the property and casualty business, which we exited two decades ago.” He pointed out that the P&C business was pro�table, but not core to Prudential’s future.✓

Continued from page 6


A Race Against Time


AD

Wondering why so many companies are in the news with pension contributions? The answer is simple: timing and taxes.

Even with the good news on funding, plan sponsors looking to make meaningful reductions in pension risk know that the �rst step is full funding.

“Part of the reason why we haven’t seen a signi�cant increase in full-plan termina-tions is around a�ordability,” said Wayne Daniel, senior vice president and head of U.S. pensions at MetLife. “Since 2000, there have been only very brief periods when the plans of the S&P 500 have been fully funded.”

Even with the additional contributions that many companies have made, reductions on investment returns and increases in Pension Bene�t Guaranty Corp. premiums mean that funding is still under considerable pressure. “To a�ord a full-plan termination, the plan sponsor would have to make a signi�cant payment,” Daniel said.

“We’ve already seen some announcements of accelerated contributions because of the higher deductibility of those contributions attributable to 2017,” said Sean Brennan, head of pension risk transfer at Athene. These contributions can be made until Sept. 15, 2018.

“What we see is plans in better-funded positions, and historically, better-funded plans have been more likely to approach pension risk transfer,” he said.

Others take the idea even further. “Tax reform and the opportunity to fund the pen-sion plan at the 2017 35% tax rate, rather than the new 21% rate is driving activity,” said Ari Jacobs, senior partner and global retirement solutions leader at Aon.

“It has led organizations to think about whether or not they should terminate the entire plan, rather than simply look for lift-outs,” he continued.

Cash contributions to corporate pension plans topped $34 billion in 2017 and, ac-cording to Securities and Exchange Commission �lings for S&P 500 companies, were set to clock in at $32 billion this year.

It isn’t just the tax incentive that is prompting this move to shore up plan funding. It’s also the fast-rising PBGC premiums, which can be onerous depending on a plan’s funded status.

“We’ve seen increased interest from our client base in taking advantage of tax reform by making contributions by Sept. 15,” said Cheryl Hanson, director of client services at NISA Investment Advisors. Alongside some clients that have made substantial contribu-tions this year, she also pointed to other clients that are looking to reduce PBGC premi-ums. Better funded plans pay less in variable-rate premiums.

P R O O F

Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001. Insurance products issued by MassMutual, Springfield, MA 01111, and its subsidiaries, C.M. Life Insurance Co. and MML Bay State Life Insurance Co., Enfield, CT 06082. Securities offered through MML Investors Services, LLC, Member SIPC and a MassMutual subsidiary. RS:45388-00

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It’s also important to remember that larger plans can have a harder time com-pleting large pension risk transfer deals than those that are simply smaller.

“Some plans are just so large that the market won’t be able to easily accommo-date all of their retirees at one time,” said Drzewiecki. “These plans will get more bidders for the business if they carve out smaller portions of the retirees.”

In some cases, just 10% or 20% will be

more appropriate for insurer capacity today. It is much easier to purchase annuities on $500 million or $1 billion in liabilities vs. a $50 billion plan, where only one or two companies have the ratings and the capital to pull o� the deal, he said.

Not all groups of bene�ciaries are cre-ated equal from the insurer’s point of view.

“Retirees in pay are a lot easier to derisk,” said MetLife’s Daniel. “Their data is current. The retiree is receiving their monthly ben-e�t, so their bank details are on record.” It is a lot simpler compared to the terminated vested population.

For terminated vested participants, the data that the plan sponsor holds may be stale or incomplete. “The data-preparation exercise will take time, e�ort and money to make sure that the plan has all the neces-sary information,” he continued.

While many plans have incorporated glidepaths into pension management as part of their move toward using liability-driven investing strategies, plan sponsors today are looking beyond investment strat-egy as a method for managing risk.

“Plan sponsors are saying, ‘Let’s incor-porate a broader road map and include

pension risk transfer as a way to get to those lower risk levels when we achieve a higher funded status,’” said Brennan at Athene.

Equally pursuing lift-outs and other par-tial buyouts doesn’t mean that termination is the ultimate goal.

“We often see the issue of getting to full funding being con�ated with the potential desire to do an annuity buyout,” said David Eichhorn, president and head of investment strategies at NISA Investment Advisors. “It’s

often a great idea from a corporate �nance perspective to fully fund the plan to avoid variable-rate [Pension Bene�t Guaranty Corp.] premiums. But that’s not a reason to subse-quently do or not do an annuity buyout.”

Full funding may also be a trigger to derisk using hibernation, he continued. The two decisions are completely independent from each other.

Last year, NISA reported that its clients engaged in some annuity transactions, but these were largely to clear small-balance participants.

“Because this activity is usually driven by cost management — the plan no longer wishes to pay the rising per-participant PBGC premiums — we are sympathetic to the use of annuity buyouts,” Eichhorn said.

“We think that annuity buyouts have a role in cost management, but not in risk management, where a hibernation solution is usually cheaper and more e�ective,” he added.

“Doing a small-balance transaction is a very short-term view,” said Prudential’s O’Brien. “It may take out 10% of your liabili-ties, but these are the most e�cient portion of your liabilities. That may mean that every

transaction you do after this is less attrac-tive because you’ve potentially left the most expensive people behind in the plan.”

The point here is two-fold. First, small-balance and lump-sum transactions need to be seen in the context of an overall derisk-ing plan. Second, the cost of the plan, while important, may be dwarfed by the risks involved in the ongoing management of the plan and the potential need for contribu-tions in the future.

It is important to remember that pen-sion risk transfer deals do not happen overnight, and even as a company weighs the pros and cons, it also needs to take into account the costs associated with manag-ing the plan during the preparation for the transfer period. “If you don’t hedge these risks, it can impact the cost of transaction,” Athene’s Brennan said.

Figuring Out the Pricing“We expect to see an evolution in the pric-ing process associated with pension risk transfer transactions,” he said. Although not possible today, the market does look ripe for the development of ways to make pricing more predictable.

For example, companies could agree to a pricing basis when the deal is struck with the insurance company. The pricing basis will usually be a price that �uctuates against an agreed benchmark. The plan sponsor can then watch that benchmark and hedge against price movements with more certainty.

Not all plans envisage o�oading their pension liabilities, even if the price is right.

“A company generally would not do a settlement because of the accounting e�ects,” said Ari Jacobs, senior partner and global retirement solutions leader at Aon.

While pension settlements typically have a negative �nancial impact on an accounting basis in the short term, these transactions also have longer-term implications.

“The plan is losing the expected return on assets, and this needs to be weighed against the discount rate,” Jacobs said.

Finally, whether to do a pension settle-ment also may come down to the amount of cash that might be needed to complete the transaction and, as always, the level of interest rates.

“Annuity buyouts are a derisking activ-ity, but they are not the sole approach. Far from it,” said NISA’s Eichhorn. ✓

34%Lump sum only

3%Other

6%Buy-in

13%Buyout only

34%Buyout in combinationwith a lump sum

34%Buyout only or buyout in combination with a lump sum

PRT Activity Most Likely to Be Used(n=129)

Note: Percentages may not total 100% due to rounding. The percentage of buyout only and buyout in

combination with a lump sum is rounded to the nearest whole number.

Source: MetLife’s 2017 Pension Risk Transfer Poll




The Tortoise

Plan sponsors opting for quick wins are organizing annuity lift-outs

and the Hare


The pension risk tranfer business has been booming. Signi�cant growth in

the volume of premiums has attracted new insurance companies to the business. The market is broader, providing solutions for all or part of corporate pension plans that wish to o�oad liabilities.

As always, activity in the market for jumbo-sized plans is episodic, although this year, FedEx Corp. bought a whopping $6 billion annuity for current retirees in a single deal from MetLife.

Most of the settlement action, however, remains in the middle- and large-market segments, where corporate plans are most often pursuing lift-out transactions. These annuity purchases can bring down pension costs by carving out a group of retirees, terminated vested employees or those with small balances.

Corporate �nance executives aren’t the only ones happy with this approach. Human resources professionals are very happy with pension risk transfer, when it is appropriate,

according to Sean Brennan, head of pension risk transfer at Athene. HR has so much to focus on in terms of current employees that being able to transfer liabilities for legacy retirees and terminated vested employees can be a very attractive option.

Annuity lift-outs are the quick wins of the pension risk transfer business. Usually completed in three to six months, these deals cost less, can be administratively sim-pler than other options and do not require the plan to have achieved full funding.

By contrast, plan terminations have been somewhat thin on the ground recently. This may be why plans have increasingly been taking the derisking road.

“The pension risk transfer market started o� with plans thinking about the whole plan and ways to mitigate the myriad risks faced,” said Glenn O’Brien, managing direc-tor and head of U.S. market for Prudential’s pension risk transfer business. “But now it has atrophied into a small-balance transac-tion business in many instances.”

As plans become more fully funded, terminations may become more common. However, it’s important to remember that few plans — other than very small ones — complete a termination in a single deal.

“We see plans coming back to market multiple times with both retirees and small balances,” said Neil Drzewiecki, vice president at MassMutual. “These deals can be �rst steps to a full derisking, or the aim may be to get the plan to a size where the sponsor feels comfortable and then just lets it run out naturally.”

Focus on the Core The reasons for derisking do remain upper-most in plan sponsors’ minds.

“Plan sponsors want to focus on their core business, looking after its pro�tability, the stakeholders and employees,” said Wayne Daniel, senior vice president and head of U.S. pensions at MetLife. “They want to allow someone else to handle the risks associated with the pension plan.”




From data cleansing to �duciary considerations, pension risk transfers require huge attention to detail

Implementing pension risk transfer trans-actions has become very e�cient. That

doesn’t mean simple.“This isn’t like buying a fund or choos-

ing an investment manager,” said Glenn O’Brien, managing director and head of U.S. market for Prudential’s pension risk transfer business. “It’s a corporate-�nance transac-tion, and a treasurer would probably think of it as an asset sale.”

There are many moving pieces and multiple parties involved, and it’s no small exercise.

It’s also time consuming. “We see an increasing use of partial-plan terminations, rather than full terminations, probably because these do take longer,” said Neil Drzewiecki, vice president at MassMutual.

There are more onerous regulatory frameworks and accounting requirements for a full shutdown of the plan. It can take 18 months to two years to work through all the steps.

One of the most common partial derisk-ing methods is to carve out the retirees and possibly also former employees who have relatively small balances in the plan. “We see a couple of bene�ts to this approach,” Drzewiecki said. “It shows the insurer that the plan has a de�ned method of derisking the plan.”

Perhaps more importantly, carving out small balances immediately lowers the cost of the plan because it gets rid of the steeply rising per-participant Pension Bene�t Guar-anty Corp. premiums.

“It’s becoming common to quickly derisk a portion of the plan, rather than going

through a full termination, and thereby getting the bene�ts of lower operating costs thanks to lower PBGC premiums,” said Drzewiecki.

“If the ultimate goal is to derisk the whole plan, sometimes you will see a carve-out of a mix of the entire plan rather than just retirees,” he continued. This would include existing participants, terminated vested ones and retirees.

“The point here is that if you leave only the most complicated and risky parts of the pension plan until termination, it may be di�cult to �nd an insurance company able to handle the deal,” he said.

Impact on What’s LeftDavid Eichhorn, president and head of in-vestment strategies at NISA Investment Ad-visors, said he thinks plan sponsors should also carefully analyze what the e�ect of a carve-out will have on the remaining plan.

“You can be surprised.” he said. “If, for instance, the carve-out includes less healthy participants, the remaining plan now has di�erent mortality expectations.” The only way to get the right pricing for the plan is to understand the longevity risks associated with both the part being sold and the part left behind.

Cost is a signi�cant issue for pension risk transfer deals and is becoming more important as the market becomes more sophisticated.

“Management and boards do not want to do pension risk transfer deals at just any cost, so they need to analyze the economic bene�ts closely,” said Sean Brennan, head of

pension risk transfer at Athene. Analysis of the economic costs and

bene�ts can be part of the overall decision-making, alongside using the framework that the Department of Labor Interpretative Bul-letin 95-1 provides for analyzing the choice of insurance company provider.

While any pension risk transfer is time consuming, a termination also requires a signi�cant amount of time. Insurers estimate a large multibillion-dollar termination trans-action will take a minimum of 18 months.

Although many parties — sponsoring company, �duciaries, insurers and all their associated advisers — are involved in any of these deals, a termination can a�ect all categories of bene�ciaries, from retirees to the deferred. Those populations may also undergo changes during the termination time period. Assets and liabilities can move too, sometimes dramatically, depending on market changes.

Because of these moving parts, insurers only ever provide an indicative price at the outset of a termination project, leading to an uncomfortable uncertainty for sponsor-ing companies.

“We see a population of plans that have been frozen for a decade or so, that have been funding up and now see the possibil-ity of termination,” Prudential’s O’Brien said. The lack of clarity around cost may be a deterrent. “We think we need to facilitate these terminations with some economic certainty,” he said.

In the future, O’Brien said he expects �nancial engineering to come into play to


Success Is in the Preparation


AD




From data cleansing to �duciary considerations, pension risk transfers require huge attention to detail

Implementing pension risk transfer trans-actions has become very e�cient. That

doesn’t mean simple.“This isn’t like buying a fund or choos-

ing an investment manager,” said Glenn O’Brien, managing director and head of U.S. market for Prudential’s pension risk transfer business. “It’s a corporate-�nance transac-tion, and a treasurer would probably think of it as an asset sale.”

There are many moving pieces and multiple parties involved, and it’s no small exercise.

It’s also time consuming. “We see an increasing use of partial-plan terminations, rather than full terminations, probably because these do take longer,” said Neil Drzewiecki, vice president at MassMutual.

There are more onerous regulatory frameworks and accounting requirements for a full shutdown of the plan. It can take 18 months to two years to work through all the steps.

One of the most common partial derisk-ing methods is to carve out the retirees and possibly also former employees who have relatively small balances in the plan. “We see a couple of bene�ts to this approach,” Drzewiecki said. “It shows the insurer that the plan has a de�ned method of derisking the plan.”

Perhaps more importantly, carving out small balances immediately lowers the cost of the plan because it gets rid of the steeply rising per-participant Pension Bene�t Guar-anty Corp. premiums.

“It’s becoming common to quickly derisk a portion of the plan, rather than going

through a full termination, and thereby getting the bene�ts of lower operating costs thanks to lower PBGC premiums,” said Drzewiecki.

“If the ultimate goal is to derisk the whole plan, sometimes you will see a carve-out of a mix of the entire plan rather than just retirees,” he continued. This would include existing participants, terminated vested ones and retirees.

“The point here is that if you leave only the most complicated and risky parts of the pension plan until termination, it may be di�cult to �nd an insurance company able to handle the deal,” he said.

Impact on What’s LeftDavid Eichhorn, president and head of in-vestment strategies at NISA Investment Ad-visors, said he thinks plan sponsors should also carefully analyze what the e�ect of a carve-out will have on the remaining plan.

“You can be surprised.” he said. “If, for instance, the carve-out includes less healthy participants, the remaining plan now has di�erent mortality expectations.” The only way to get the right pricing for the plan is to understand the longevity risks associated with both the part being sold and the part left behind.

Cost is a signi�cant issue for pension risk transfer deals and is becoming more important as the market becomes more sophisticated.

“Management and boards do not want to do pension risk transfer deals at just any cost, so they need to analyze the economic bene�ts closely,” said Sean Brennan, head of

pension risk transfer at Athene. Analysis of the economic costs and

bene�ts can be part of the overall decision-making, alongside using the framework that the Department of Labor Interpretative Bul-letin 95-1 provides for analyzing the choice of insurance company provider.

While any pension risk transfer is time consuming, a termination also requires a signi�cant amount of time. Insurers estimate a large multibillion-dollar termination trans-action will take a minimum of 18 months.

Although many parties — sponsoring company, �duciaries, insurers and all their associated advisers — are involved in any of these deals, a termination can a�ect all categories of bene�ciaries, from retirees to the deferred. Those populations may also undergo changes during the termination time period. Assets and liabilities can move too, sometimes dramatically, depending on market changes.

Because of these moving parts, insurers only ever provide an indicative price at the outset of a termination project, leading to an uncomfortable uncertainty for sponsor-ing companies.

“We see a population of plans that have been frozen for a decade or so, that have been funding up and now see the possibil-ity of termination,” Prudential’s O’Brien said. The lack of clarity around cost may be a deterrent. “We think we need to facilitate these terminations with some economic certainty,” he said.

In the future, O’Brien said he expects �nancial engineering to come into play to


Success Is in the Preparation


AD


1 Group annuity contracts can be issued by Metropolitan Life Insurance Company, 200 Park Ave., New York, NY 10166 or Metropolitan Tower Life Insurance Company, 5601 South 59th St., Lincoln, NE 68516. Like most group annuity contracts, MetLife group annuities contain certain limitations, exclusions and terms for keeping them in force. Ask a MetLife representative for costs and complete details.L0818507629[exp0819][All States] © 2018 MetLife Services and Solutions, LLC

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“Five years ago, plan sponsors were looking at how to reduce �nancial risk on their balance sheets, usually by reducing their allocation to equities,” Brennan said. “Now they are looking more holistically at how to manage pension costs, not just pension risks.”

That’s why Brennan is seeing an increase in the approach of o�ering lump sums to participants and growth in annuity buyouts. “It’s a way to avoid the rapidly rising PBGC premiums while also reducing pension risk,” he said, referring to annual premiums the Pension Bene�t Guaranty Corp. charges corporations.

“Plans think now is the time to address the risks associated with their pension plan, knowing that they need to take a close look at operating expenses,” said MassMutual’s Drzewiecki.

O’Brien at Prudential added: “Tax reform has produced activity in the U.S. pension market, with sponsors taking the oppor-tunity to fund up their plans. This provides something of a hedge against the risk of rising regulatory costs.” Sponsors have been focused on the rising variable-rate PBGC premiums.

“We see many more plan sponsors hir-ing experts and consultants to help them analyze plans to understand what options are available,” Drzewiecki said.

“If you are going down a pension risk transfer route, then you need to address the regulatory and �duciary issues raised by Department of Labor guidance (DOL In-terpretative Bulletin 95-1),” he said. It’s also important to understand if the settlement is only partial, then how will the company administer the remaining plan? ✓

help provide economic certainty for compa-nies and boards. It would allow companies to weigh the advantages and disadvantages of maintaining vs. terminating the plan more e�ectively.

Group Annuity ConsiderationsWhen considering a group annuity buyout, plan sponsors need to consider how to structure the solution. The annuities can be-come part of the insurer’s general account — the cheapest option — or the sponsor may opt for a separate account annuity solu-tion that is ring-fenced and insulated from the activities of the company. While more expensive, separate account annuities can provide piece of mind to sponsors for what can be a 30-year-plus transaction.

When a plan sponsor is evaluating an insurance company for an annuity purchase, one of the key metrics is the �nancial strength of the insurer, represented by their rating, as well as the other business it has on its books. What the sponsor is looking for is a guide to gauging the creditworthiness of the insurer.

“There’s a view out there that an insulated separate account gives a layer of protection in case there is an issue with the insurance company,” said MassMutual’s Drzewiecki. “This is just one of the factors that plan sponsors, with the help of their consultants, need to weigh and analyze.”

“The most important factor early in the process of pension risk transfer is to make sure that the plan documents and data are in good order,” he continued. “To make the hando� smooth, the pension plan needs to be ready.”

Drzewiecki pointed out that insurers are well-placed to guide plan sponsors through this process and are used to working with actuarial �rms in assessing the quality of the data and documentation.

After a pension plan chooses an insurer, the parties sign a non-disclosure agree-ment. Then the insurer will be able to review both the assets and liabilities of the tranche that is out to tender.

“Many plan sponsors think that their data is clean because they are paying ben-e�ts to retirees every month,” said Athene’s Brennan. While many plans have done data-cleansing exercises, often these have not extended to deferred participants.

In some cases, those bene�ts were calculated years ago, with the records held in paper copies. “It can be hard to identify what the bene�ts should be, let alone where those people are,” Brennan said.

Some of these data issues are addressed when a company undertakes a lump-sum exercise. But this isn’t a one-and-done situ-ation. “Just because a company did a data-cleansing exercise several years ago doesn’t mean the work is over,” he said.

“When a retiree �rst gets a letter saying that their pension will now be serviced by another company or transferred to an insur-ance company, their reaction is always, ‘Is this going to be as good as what I had before?’” Drzewiecki explained. Thus it’s important to choose an insurer that is able to provide a good client experience for each bene�ciary.

Communications Are Key“Our ability to administer e�ectively for the participants is uppermost in our minds,” said Wayne Daniel, senior vice president and head of U.S. pensions at MetLife. “That’s not just the obvious aspect of being able to pay the bene�ts when they become due, but also in terms of customer service.” Participants expect to have online access to their account and a call center that is able to carry out time-ly and appropriate responses to inquiries.

While companies are vetting insurers regarding their investment capabilities, increasingly they are also interested in drilling down into the operational issues. “For many plan sponsors this is a �duciary consideration, as they don’t want to be �eld-ing calls or complaints from retirees on their operational experience,” said Drzewiecki.

Frequent communication is key to ensur-ing a smooth pension risk transfer transac-tion. “At MassMutual we form a team that of-fers regular communication points with the plan sponsor, [we] share documents [and we have a process that] is very clear about the dates and what is going to happen when,” Drzewiecki said. The insurer also uses a tran-sition manager on each transaction.

Security is another concern of plan spon-sors. “All our [requests for proposals] address cyber- and data-security today,” Brennan at Athene said. “It’s not just about the security of the data today or at transfer, but going forward as well. In many cases, plan sponsors are already focused on cybersecurity threats, so they want to make sure their partner has the same commitment to security.” ✓

Continued from page 12 Continued from page 5

$25BEstimated pension transfer

volume for 2018





“Five years ago, plan sponsors were looking at how to reduce �nancial risk on their balance sheets, usually by reducing their allocation to equities,” Brennan said. “Now they are looking more holistically at how to manage pension costs, not just pension risks.”

That’s why Brennan is seeing an increase in the approach of o�ering lump sums to participants and growth in annuity buyouts. “It’s a way to avoid the rapidly rising PBGC premiums while also reducing pension risk,” he said, referring to annual premiums the Pension Bene�t Guaranty Corp. charges corporations.

“Plans think now is the time to address the risks associated with their pension plan, knowing that they need to take a close look at operating expenses,” said MassMutual’s Drzewiecki.

O’Brien at Prudential added: “Tax reform has produced activity in the U.S. pension market, with sponsors taking the oppor-tunity to fund up their plans. This provides something of a hedge against the risk of rising regulatory costs.” Sponsors have been focused on the rising variable-rate PBGC premiums.

“We see many more plan sponsors hir-ing experts and consultants to help them analyze plans to understand what options are available,” Drzewiecki said.

“If you are going down a pension risk transfer route, then you need to address the regulatory and �duciary issues raised by Department of Labor guidance (DOL In-terpretative Bulletin 95-1),” he said. It’s also important to understand if the settlement is only partial, then how will the company administer the remaining plan? ✓

help provide economic certainty for compa-nies and boards. It would allow companies to weigh the advantages and disadvantages of maintaining vs. terminating the plan more e�ectively.

Group Annuity ConsiderationsWhen considering a group annuity buyout, plan sponsors need to consider how to structure the solution. The annuities can be-come part of the insurer’s general account — the cheapest option — or the sponsor may opt for a separate account annuity solu-tion that is ring-fenced and insulated from the activities of the company. While more expensive, separate account annuities can provide piece of mind to sponsors for what can be a 30-year-plus transaction.

When a plan sponsor is evaluating an insurance company for an annuity purchase, one of the key metrics is the �nancial strength of the insurer, represented by their rating, as well as the other business it has on its books. What the sponsor is looking for is a guide to gauging the creditworthiness of the insurer.

“There’s a view out there that an insulated separate account gives a layer of protection in case there is an issue with the insurance company,” said MassMutual’s Drzewiecki. “This is just one of the factors that plan sponsors, with the help of their consultants, need to weigh and analyze.”

“The most important factor early in the process of pension risk transfer is to make sure that the plan documents and data are in good order,” he continued. “To make the hando� smooth, the pension plan needs to be ready.”

Drzewiecki pointed out that insurers are well-placed to guide plan sponsors through this process and are used to working with actuarial �rms in assessing the quality of the data and documentation.

After a pension plan chooses an insurer, the parties sign a non-disclosure agree-ment. Then the insurer will be able to review both the assets and liabilities of the tranche that is out to tender.

“Many plan sponsors think that their data is clean because they are paying ben-e�ts to retirees every month,” said Athene’s Brennan. While many plans have done data-cleansing exercises, often these have not extended to deferred participants.

In some cases, those bene�ts were calculated years ago, with the records held in paper copies. “It can be hard to identify what the bene�ts should be, let alone where those people are,” Brennan said.

Some of these data issues are addressed when a company undertakes a lump-sum exercise. But this isn’t a one-and-done situ-ation. “Just because a company did a data-cleansing exercise several years ago doesn’t mean the work is over,” he said.

“When a retiree �rst gets a letter saying that their pension will now be serviced by another company or transferred to an insur-ance company, their reaction is always, ‘Is this going to be as good as what I had before?’” Drzewiecki explained. Thus it’s important to choose an insurer that is able to provide a good client experience for each bene�ciary.

Communications Are Key“Our ability to administer e�ectively for the participants is uppermost in our minds,” said Wayne Daniel, senior vice president and head of U.S. pensions at MetLife. “That’s not just the obvious aspect of being able to pay the bene�ts when they become due, but also in terms of customer service.” Participants expect to have online access to their account and a call center that is able to carry out time-ly and appropriate responses to inquiries.

While companies are vetting insurers regarding their investment capabilities, increasingly they are also interested in drilling down into the operational issues. “For many plan sponsors this is a �duciary consideration, as they don’t want to be �eld-ing calls or complaints from retirees on their operational experience,” said Drzewiecki.

Frequent communication is key to ensur-ing a smooth pension risk transfer transac-tion. “At MassMutual we form a team that of-fers regular communication points with the plan sponsor, [we] share documents [and we have a process that] is very clear about the dates and what is going to happen when,” Drzewiecki said. The insurer also uses a tran-sition manager on each transaction.

Security is another concern of plan spon-sors. “All our [requests for proposals] address cyber- and data-security today,” Brennan at Athene said. “It’s not just about the security of the data today or at transfer, but going forward as well. In many cases, plan sponsors are already focused on cybersecurity threats, so they want to make sure their partner has the same commitment to security.” ✓

Continued from page 12 Continued from page 5

$25BEstimated pension transfer

volume for 2018




U.S. corporations plan to contribute $32 billion to their global pension funds in 2018. Six will contribute between $1 and $6 billion, and 11 will contribute between $500 million and $1 billion. Source: Pensions & Investments, March 19, 2018.

Insurance products are issued by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or The Prudential Insurance Company of America (PICA), Newark, NJ. Both are Prudential Financial companies. Each company is solely responsible for its respective �nancial condition and contractual obligations.

© 2018 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

0317197-00001-00 PRTADRE12_0002 07/2018

Pension de�cits will not resolve themselves. Billions of dollars have been contributed to fund up plans in 2018. Why? There has never been a better time to make a contribution, close funding gaps, and take steps to meaningfully reduce risk.

What step will you take?

Visit pensionrisk.prudential.com

CARPE DIME

Pension Risk Supplement.pdf RunDate: 09/03/14 pi supp 8 x 10.875 Color: 4/C


All registration requests are subject to verification. P&I reserves the right to refuse any registrations not meeting our qualifications. The agenda for the Pension Risk Strategies Summit is not created, written or produced by the editors of Pensions & Investments, and does not represent the views or opinions of the publication or its parent company, Crain Communications, Inc.

*Registration is only open to pension plan sponsors and a limited number of investment consultants.

Questions? For more details please contact Elayne Glick at (212) 210-0247 or [email protected]

lead sponsor:

Complimentary registration at www.pionline.com/RISK2018*

The Pension Risk Strategies Summit features case studies presented by pension fund fiduciaries and investment managers who discuss their pension risk strategies and why they were chosen. Between panel discussions and plan sponsor case studies, attendees receive the information they need to make the best decisions for their pension fund and hear how to create an actionable plan to implement those decisions.

We are pleased to present our Keynote Lineup:

ATLANTA: OCT 2 | DALLAS: OCT 4 | CHICAGO: OCT 9 | NEW YORK: OCT 11

CHRIS BROWNController

City of Houston

SASKIA GOEDHARDTChief Risk O�cer

Investment Management Corporation of Ontario

MARIE PILLAIVice President,

Chief Investment O�cer & Treasurer

General Mills

CAROL W. TUSCHDirector Trust Investments

International Paper

ERNIE CABALLEROChief Investment O�cer

UPS

DARRELL THOMASVice Presidentand Treasurer

Harley-Davidson, Inc.

co-sponsors: associate sponsor:

Preparing for a Manageable Future€¦ · Prepping Pension Plans for the Future Options on the...

Documents

Transcript of Preparing for a Manageable Future€¦ · Prepping Pension Plans for the Future Options on the...