5 Truths, 5 Years Later About Pension Risk Transfer
by Andrew WilkinsonMr. Wilkinson is Senior Vice President and Managing Principal, McCready and Keene, a OneAmerica Company, focusing on actuarial and employee benefits consulting. Visit here to learn more
According to Milliman, the number of pension plans offering defined benefits in the United States plummeted by about 73% from 1986 to 2016, and in a recent column on the topic USA Today bluntly opined that American businesses think of pensions as “swiftly becoming a thing of the past.” The pension risk transfer (PRT) market, on the other hand, looks to continue to grow steadily for years to come. And many strong insurance companies are supporting this growth.
Nationally, corporate pension plan PRT sales totaled about $4.7 billion during the first quarter of 2019, the highest for any first quarter in more than 30 years, according to the LIMRA Secure Retirement Institute. PRT are a port in the storm as pension plan sponsors and other fiduciaries involved with employer plans react to market pressures to reduce earnings volatility, risk, and expense. Transferring the pension obligation also allows companies large and small to focus on their core business as well as shift their employer contributions to more popular investment vehicles like the 401(k) . The market potential looks strong in part because of a recent LIMRA Secure Retirement Institute study found that 8 in 10 private-sector defined benefit (DB) plan sponsors are at least somewhat interested in PRT. The LIMRA study also showed that 4 in 10 plan sponsors say they are “very” interested in PRT, marking a 12 percentage-point increase from plan sponsors surveyed in 2014.
With about a dozen insurance companies involved in PRT market and many small-to-medium-sized business looking to potentially divest, one might think PRT is an easy business to grow. Given the strength and size of the competitors, it’s not that simple. While competitive pricing is a top consideration, plan sponsors and consultants consider financial strength, pricing consistency, flexibility, and a commitment to service and administrative capabilities. When OneAmerica (through its subsidiary American United Life Insurance Company®) entered the PRT market in 2014, it was one of the first new entrants in the past two decades. After its first five years here are five observations about PRT that OneAmerica has experienced.
Knowledgeable PRT intermediaries are important for both the plan sponsor and the insurance companies
In the PRT market intermediaries usually act in an advisory role. These intermediaries are specialists who are experienced in doing these transactions and help make sure the client does not run afoul of complex accounting and regulatory issues and meets the plan sponsor’s ERISA fiduciary standards. The sponsor relies on the intermediary to know the market and to bring a number of qualified insurance companies to the table to bid. It should be noted that non-specialists may think they might be able to handle the transfer themselves or become fixated on one insurance company, but they risk wasting time unnecessarily. Intermediaries know what questions to ask.
Stick to your knitting – you can’t be all things to all people
When a financial services company wins a PRT case the carrier doesn’t always find out the specific reason why they were the top choice. Sometimes the exact same competition you just beat out might have bested you during a previous bid. Companies are on the win-place-show line with each other at some point. That’s why it is important as a provider to know and focus on the target market. The OneAmerica target market began in the $3 million to $30 million range but has grown to $10 million and $50 million. In our situation, we constantly evaluate the target market to make sure we are focusing on areas where can administratively handle the business, differentiate ourselves in the market, and meet our financial objectives.
A great business starts with great people
PRT requires a very knowledgeable and skilled team. Administering pension benefits, investing assets to meet cash flows for the next 40+ years, and pricing and managing the ongoing risks are some of the most complex functions of an insurance company. Our success has been due to a lot of talented and dedicated people who are students of the business and that keep current on best practices in PRT. They are constantly trying to improve our organization and create efficiencies and lower costs.
Price matters, but if you lose on price it doesn’t mean it was wrong
Because the selection criteria are unique to each plan sponsor, sometimes decisions are based on price but at times the price point can be surprising. So it’s important to note that just because the lowest premium wins doesn’t mean the PRT was quoted improperly or imprecisely. Each insurance company might look at it slightly differently. Losing doesn’t mean you are wrong, and a solid strategy includes not chasing business for the sake of chasing business and to price the PRT that is fair for the insurance company, for the plan, and for the annuitants.
Outstanding customer service experience is key
When OneAmerica re-entered the PRT market five years ago, we had all the system components we needed including state-of-the-art software tools that we used to support our McCready and Keene pension consulting business and were then leveraged for PRT annuity administration, pricing, and valuation. We also had financial strength ratings and actuarial and legal professionals with extensive experience in defined benefit administration. These are very important. As you grow you must still get the basics right, especially attention to detail and paying attention to annuitants’ needs.
To that end we recognize that different annuitants have different needs. A retiree may only need a phone number to feel satisfied. A younger annuitant might define outstanding customer experience as something much different. To that end, we launched a new portal to enhance the participant experience, one that has a number of self-service features and resources which provide pensioners the same sort of access that is commonplace on our defined contribution side. They’ll be able to see their account, make banking changes, change tax withholding, and manage their beneficiary information – which is not a common offering with all companies that deal with pensions. So those are two different approaches based on the same philosophy of providing an outstanding customer service experience.
When we entered the business five years ago we thought it would not really be a blossoming market until interest rates rose. Clearly, plan sponsors and investors recognize that eliminating uncertainty, risk, and cost does not have to wait until interest rates rise. There are still over $3 trillion in private pension assets and given the current PRT market of about $25 billion per year, we believe there is still plenty of opportunity for the PRT market to continue to grow despite this period of historically low interest rates.