MAJORITY OF PLAN SPONSORS CONSIDERING BUYOUTS OF RETIREE LIFE, MEDICAL OBLIGATIONS
Nearly nine in ten plan sponsors considering the transfer of all or some of these liabilities to insurers, according to MetLife’s 2023 Post Retirement Benefits Poll
NEW YORK, February 08, 2023
In the coming years, a significant majority of plan sponsors are considering transferring some or all of their retiree medical and retiree life insurance obligations to an insurance company. Eighty-eight percent of plan sponsors reported that they are considering a retiree medical buyout and 84% note they are considering a retiree life buyout, according to MetLife’s inaugural Post Retirement Benefits Poll.
“Retiree life and medical benefits are promises that retirees and their families count on. Given the long-term nature of these liabilities, plan sponsors are exposed to investment risk, interest rate risk and mortality or longevity risk, which create challenges around managing these liabilities.” said Jay Wang, senior vice president and head of Risk Solutions for MetLife’s Retirement & Income Solutions (RIS). “For plan sponsors, these risk transfer solutions help to mitigate volatility on their corporate balance sheets. For retirees, it improves security of these promises by shifting these obligations to an insurer with deep expertise and long history of managing these risks.”
The Role of Post Retirement Benefits
Traditionally, post retirement benefit offerings, including pensions, retiree life and retiree medical, have played a critical role in attracting and retaining employees. Today, besides the pension benefits, many companies still have open retiree life and retiree medical plans. The Poll found 86% of companies report having open retiree medical insurance plans and the same percentage (86%) report their retiree life insurance plans are still open.
“Due to the nature of these offerings, they accumulate liabilities over many years and their promises extend well into the future,” said Charlie DeClara, assistant vice president and head of RIS Post Retirement Benefits. “Because of this, plan sponsors have been exploring strategies to fund or transfer obligations associated with these benefits and to address the financial impact of their volatility.”
More than eight in ten plan sponsors (85%) report that their company’s post retirement benefits receive significant attention from corporate management because of financial effects on their corporate balance sheet and income statement.
Post Retirement Funding and Buyout Solutions
The Poll found that most of the plan sponsors surveyed were familiar with the concepts of funding or transferring some or all obligations through a retiree medical buyout (89%) or retiree life insurance buyout (89%).
According to the plan sponsors surveyed, the most important benefit of a retiree medical buyout is lifetime security for retirees’ healthcare benefits (71%). Half of plan sponsors cited improving benefit security for retirees as an important factor for retiree life insurance buyouts.
SECURE 2.0 and the Future of Post Retirement Funding and Buyout Solutions
An important consideration when looking at a retiree medical or retiree life insurance buyout is the funded status of the obligations. Having a well-funded plan allows plan sponsors to develop long-term solutions to a buyout or to transfer these obligations to an insurance company, which would settle or remove these liabilities from the corporate balance sheet.
The COVID Tax Relief Acts of 2020 and 2021 took a significant step in helping plan sponsors improve the funding of these obligations. As a result of this legislation and under Internal Revenue Code 420, plan sponsors have the ability to transfer excess pension assets from an overfunded defined benefit (DB) plan to fund retiree medical/retiree life insurance obligations. In late 2022, the SECURE 2.0 Act was passed extending this provision, delaying its sunset from the end of 2025 to 2032.
“SECURE 2.0 ensured plan sponsors have extended access to a valuable tool to help them manage the funding levels of their retiree life and retiree medical liabilities,” said DeClara, assistant vice president and head of RIS Post Retirement Benefits. “By making the requirements for transferring excess pension assets to fund these obligations less burdensome, plan sponsors can take an important first step on the road to a potential buyout.”
Plan sponsors recognize the importance of this legislation. At the time of the survey, most plan sponsors (87%) had been closely following SECURE 2.0 and related legislation, and 84% believe it was important for SECURE 2.0 to extend this provision.