Pension Risk

Many plan sponsors are using different approaches to investment management and risk mitigation. These may include traditional asset allocation, Liability Driven Investing, or using annuities to reduce risk.

Annuities can be used in different ways to mitigate risks, such as:

Investment, interest rate, longevity and participant behavior risks;
The need for liquidity to meet benefit payments; and
Funded status, balance sheet and earnings volatility.

The most effective strategy may involve a combination of approaches.

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Traditional Asset Allocation

Traditional asset allocation, such as a 60% / 40% approach, is often focused predominantly on the asset side of the balance sheet. The trade-off is retention of all risks and ongoing costs, volatility in funded status and earnings, as well as a significant risk of mismatching assets, liabilities, and cash flow requirements at any point in time.

Liability Driven Investing (LDI)

LDI strategies, broadly defined, seek to reduce volatility of the plan’s funded status by linking the interest rate responsiveness of the plan’s assets and liabilities. But the investment portfolio will need to be rebalanced periodically as rates change and the liability evolves. This can be labor intensive. In addition, LDI provides no protection against unanticipated increases in longevity and, for non-retired participants, other unanticipated changes in benefit payments due to early retirement or the form of benefit elected.

Annuity as a Plan Asset ("Buy-In")

Using annuities as a plan asset mitigates risk associated with a defined group of plan participants. This method is similar to the “buy-in” strategy which is popular in the U.K. The group annuity contract can actually be viewed as part of an LDI strategy by truly defeasing longevity and participant behavior risks associated with the defined group of participants, in addition to mitigating interest rate and investment risks. In doing so, a plan’s funded status volatility is reduced, and the gap presented by limitations in LDI’s overall risk protection is reduced.

The use of an annuity as a plan asset as part of an LDI strategy can help in building a “dynamic” approach to asset allocation. The risks associated with the defined portion of the plan are immunized as cash flow needs for making benefit payments to the defined plan participants are guaranteed by MetLife. It’s another effective risk reduction strategy and because the annuity is held as a plan asset, we believe no settlement accounting would occur. Our solution is called Pension Cash Flow Guarantee^SM.

Partial Risk Transfer

Partial Risk Transfer – which involves the settlement of a portion of plan assets and liabilities – eliminates the risks associated with the assets and liabilities transferred. The settlement of liabilities for a block of participants will completely remove investment risk and interest rate risk, but also will remove longevity and participant behavior risks. Therefore, Partial Risk Transfer also can be an effective component of a dynamic asset allocation strategy.

Full Pension Closeout

A full pension closeout is a settlement of all plan assets and liabilities through the purchase of a group annuity contract. All plan-associated risks, as well as ongoing management costs, are removed.

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Non-Participating Financial Arrangement

A non-participating financial arrangement is the simplest and most frequently used approach to transferring all or a portion of the risks and obligations associated with a defined benefit plan. It is a single premium group annuity contract in which MetLife assumes all risks associated with the plan, such as investment, interest rate, longevity and participant behavior risks.

Our team of professionals will take a consultative approach to determine whether this or another approach best fits each client's needs in reaching its financial goals.

One Way Participating Financial Arrangement

A One Way Participating financial arrangement is one approach for defined benefit plan sponsors seeking to balance plan security with financial flexibility and efficiency. The One Way Participating financial arrangement is a single premium group annuity contact suitable for plan sponsors who wish to transfer all or a portion of their plan liabilities to MetLife – and are prepared to accept a higher initial premium in return for the potential of receiving a lower total net cost.

Under a One Way Participating financial arrangement, an ongoing relationship is created between the contract holder (the plan’s trust or the employer) and MetLife. If favorable experiences occur, such as higher than expected mortality, MetLife will make a payment to the plan sponsor, effectively reducing the initial cost of the guaranteed arrangement to the sponsor or the plan.

The One Way Participating financial arrangement represents one flexible solution offered by MetLife. Our team of professionals takes a consultative approach to help determine whether this or another approach best fits each client’s needs and financial goals.

For solutions tailored to your organization's financial and benefit goals, contact MetLife:

Pensions:
1-888-217-1858
Stable Value:
1-888-217-1858
Retirement Income:
1-888-292-1630
Specialized Benefit Resources (SBR):
1-877-MET-EXEC
Post Retirement Benefits (PRB):
PostRetirementBenefits@metlife.com

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