PENSION BUY-INS EMERGING AS RISK MITIGATION STRATEGY
New York, November 18, 2014
As defined benefit (DB) pension plan sponsors continue to face challenges in managing the risks associated with their DB pension plans, nearly one-third (29%) are likely to consider a pension risk transfer option for their plans in the next two years. This is according to findings from MetLife’s new Pension Risk Transfer Poll released today.
Although the majority of these plan sponsors are leaning toward a traditional pension buy-out, in which a highly rated insurance company assumes some or all of a pension plan’s obligations and makes pension payments to the plan’s retirees and/or beneficiaries, 15% of respondents who are considering pension risk transfer options report they are likely to opt for a pension buy-in. In a buy-in, a plan sponsor holds a group annuity contract as a DB plan investment and uses it to fully mitigate funded status volatility and other risks by ensuring that a specified portion of the plan’s ongoing cash flow requirements are guaranteed.
“While pension buy-outs continue to be the most common vehicle for pension risk mitigation transactions, pension buy-ins, which are more popular in the U.K., are gaining interest in the U.S., especially among smaller plans,” said Wayne Daniel, senior vice president, U.S. Pensions at MetLife. “The poll findings demonstrate that awareness of and interest in pension buy-ins is growing in the US, and the reality that plan sponsors are investigating all of their options when it comes to pension risk mitigation.”
Buy-Outs Still Short Term Focus
Buy-outs, however, remain the most popular action for the immediate future. Of the nearly one-third of DB plan sponsors (29%) who are likely to consider a pension risk transfer option in the next two years, 73% are leaning toward a buy-out. Among these plan sponsors considering a buy-out, the majority would secure a buy-out for retirees (48%) and terminated vested employees (46%) compared with only 13% who would secure a buy-out for all employees. The largest plan sponsors are most likely to initiate a pension risk transfer over the next two years: 38% of those with DB plan assets of $500 million - $1 billion and 30% of those with assets of more than $1 billion indicated they are considering taking action within this time frame.
Plan Liabilities and Long-Term Cost Control Are Priorities
According to the poll, the leading reason among respondents to consider a pension risk mitigation transaction is long-term cost control, with over two-thirds of respondents (69%) stating that this is making the purchase of a group annuity contract for pension risk transfer more attractive. This is significantly more than the number of respondents (47%), who state they no longer want to retain the risk. Among the group most likely to conduct a pension risk transfer of any kind – those with DB plan assets of $500 million-$1 billion – 86% are concerned about long-term cost control and 43% no longer want to retain the risk.
“The focus on cost control is not new, but what did surprise us was a related finding – that concern about DB pension plan liabilities has overtaken funding status as a priority for plan sponsors,” said Daniel. “We’re encouraged by the finding and hope it means that plan sponsors are feeling more confident about their plan funded status and able to focus more on the long-term impact DB pension plan liabilities could have on their balance sheets.”
The poll found that nearly four in ten plan sponsors (37%) state that pension plan liabilities are a greater priority, compared to 26% who stated that their plans funded status has become a greater priority. An overwhelming majority of plan sponsors (82%) report a funding ratio greater than 80%.
About the Poll
The Pension Risk Transfer Poll was fielded between September 23 and October 6, 2014. Defined benefit (DB) plan sponsors from Fortune 1000TM companies, as well as the next largest 2,000 companies by DB plan asset size, were invited by Asset International (publisher of PLANSPONSOR and PLANADVISER magazines) to participate in the poll. MetLife commissioned MMR Research Associates, Inc. to conduct the online survey in cooperation with Asset International. There were 228 respondents whose titles ranged from CFO, CIO and Treasurer to VP and Director of Compensation and Benefits. Three in four respondents (76%) reported DB plan assets of $250 million or more, with 42% having assets greater than $1 billion.
MetLife, Inc. (NYSE: MET), through its subsidiaries and affiliates (“MetLife”), is a leading global provider of insurance, annuities and employee benefit programs. MetLife holds leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East. For more information, visit www.metlife.com.