What’s Next for the Pension Risk Transfer Market?

In our latest LIMRA Unplugged episode Alison Salka, LIMRA research director, and Scott Gaul, head of Investment and Pension Solutions for Prudential Retirement, discuss current trends in the pension risk transfer market, the challenges plan sponsors face and some of the misconceptions about the time and costs needed to purchase a pension risk transfer solution.

The U.S. pension risk transfer market has steadily expanded over the past several years. According to the Secure Retirement Institute (formerly LIMRA SRI), the number of single premium buy-out sales contracts have more than doubled over the last several years—from 217 in 2013 to 488 in 2018. With much of the growth coming from mid-sized companies, SRI expects the number of new contracts to surpass 500 by the end of 2019 with sales in the $20-$25 billion range.

What is prompting this growth?

Today’s defined benefit (DB) plan sponsors face significant headwinds with maintaining their DB plans. Low interest rates and greater market volatility, along with increased longevity of plan participants, and rising Pension Benefit Guaranty Corp premiums all undercut the viability of affording a DB plan.

According to SRI research, almost half of DB plans in the U.S. are frozen, meaning existing participants have stopped earning benefits through the plan and new employees are not eligible to participate. The employer, however, is still responsible for paying the benefits already incurred. Offloading the existing DB liability allows companies to refocus resources toward business growth and current and future employees. This is where pension risk transfer solutions can help.

Plan sponsor demand is strong for pension risk transfer products. SRI research reveals 8 in 10 DB plan sponsors are very or somewhat interested in a pension risk transfer deal. In 2018, single-premium pension buyout sales reached $26 billion, the highest year for sales on record (excluding the jumbo deals in 2012). All evidence indicates that the future of the pension risk transfer market will be positive, and SRI fully expects this market will continue to grow in 2020 and beyond.