Pension Risk Transfer: A Look at the Fundamentals

A pension risk transfer shifts some or all of the risk from the plan sponsor to an insurer. This allows the plan sponsor to reduce the plan’s overall volatility, improve its funded status, and help bring stability to the company’s bottom line. At the same time, it ensures that retirees receive their benefits, and the plan sponsor upholds its responsibilities to former employees.

When a pension risk transfer occurs, the sponsor typically transfers the plan’s assets to an insurer, such as MetLife. In turn, the insurer assumes the responsibility of paying out retiree benefits.

A partial risk transfer occurs when a plan sponsor settles a portion of the pension plan’s liabilities through an annuity buyout. By reducing the plan size, the sponsor can eliminate a majority of the risks associated with the transferred portion.

This strategy can be particularly attractive to plan sponsors, thanks to its ability to reduce PBGC premiums. Plan sponsors must pay fixed-rate premium based on the number of participants in the plan (i.e. a “per head” rate). The 2025 flat-rate premium is $39 per participant or $106 per participant for single-employer plans.¹ By completing a partial risk transfer, plan sponsors reduce the number of participants and, in turn, the associated PBGC premiums.

To secure retirement benefits for retirees, sponsors can offer participants a lump sum that equals the estimated equivalent of their accrued benefits, or transfer liabilities to an insurer through a pension risk transfer.

A PRT is designed to help companies de-risk their defined benefits plan while still meeting the needs of their plan’s retirees, and fulfilling their fiduciary obligations.

Before initiating a pension risk transfer to an insurer, your company should take several steps to prepare for the process, including:

1. First and foremost, retain a consultant to help guide you through the pension risk transfer process.
2. Obtain the necessary internal approvals to move forward in de-risking your pension plan.
3. Monitor market returns and interest rates to identify the ideal economic conditions to move forward with a risk transfer strategy.
4. Next, plan sponsors should assess current plan costs, as well as the financial impact that a risk reduction strategy may have on factors including:
   • Funded status
   • Earnings volatility
   • Ongoing expenses

As you move forward, it’s important to interpret the plan’s economic liability, or the cost to settle the liability, and the accounting impacts of a risk transfer strategy.

The duration of a pension risk transfer depends on the specific plan. However, a PRT deal typically takes between six months and a year for a lift-out, or up to 18 months for a full plan termination. A lift-out refers to a specific subset of the participant pool that the plan sponsors have identified as the most suitable candidates for a pension risk transfer.

While plan sponsors may not have much control over the timeline, there are certain factors that can either prolong or expedite the process. For example, relying on accurate participant data during an annuity buyout can better streamline the process. When an insurer is taking on pension liability, they must have the most up-to-date and accurate census data available. Otherwise, the deal will not close until the insurer is given the correct information.

In addition, the timeline of a pension risk transfer will also depend on factors like:

• Population demographics of participants
• Size of the transaction
• How much preparation the plan sponsor has done

In an annuity buyout, a plan sponsor purchases a group annuity contract from an insurer. The sponsor then transfers all of their defined benefit plan’s obligations and related risks to the issuing insurance company.

What are the costs associated with an annuity buyout?

If your company is considering pursuing an annuity buyout, it’s important to understand the cost associated with this risk transfer strategy.

First, a defined benefit plan does not have to be fully funded before pursuing a pension buyout through a group annuity contract. However, the process affects plan assets, and plan sponsors must be sure that transferring risks justifies the reduction in overall plan funding. If the plan’s funded status falls below 80% after a buyout, the IRS may restrict benefits on plan payments and revoke the plan’s credit balance.²

When determining how much an annuity buyout may cost your company, keep in mind that in the years following the buyout, it’s likely the minimum required contribution amount will increase. In addition, PBGC premiums may increase as well. This will depend primarily on the variable-rate premiums, or VRPs, as they may increase if the plan’s funded status drops following the annuity buyout.³

The steps of an annuity buyout

When a company pursues an annuity buyout, it can expect to go through several phases.

Choosing the Right Insurer for Your Pension Risk Transfer

MetLife has served as a leader in the pension risk transfer industry for over 100 years. Since 1921, we’ve worked hand-in-hand with sponsors to provide their employees with secure retirement income while protecting their own balance sheets using thoughtful de-risking solutions. By partnering with MetLife, plan sponsors can gain confidence in achieving their goals of reducing financial

MetLife has a proven track record in the industry, managing around $5.5 billion in benefit payments each year for around 915,000 retirees and beneficiaries⁴. Our robust history and deep expertise in transferring pension liabilities establishes us as a prominent, go-to insurer for plan sponsors and their participants.

Over 100 years ago, MetLife developed and executed the first group annuity contract to fund a defined benefit (DB) plan. This solidified our place in the pension risk transfer market, which we proudly continue serving today.