Pension Risk Transfers Rebound

U.S. single-premium pension buyout sales in the second quarter of 2021 were double those of the same period last year, and  pension risk transfers likely will remain robust, say recent reports.

In the second quarter, reports the Secure Retirement Institute (SRI) in its U.S. Group Annuity Risk Transfer Sales Survey, U.S. single premium buyout sales amounted to $5 billion. That was 119% higher than the value of such sales in the same quarter one year before. SRI says that there were 87 single premium buy-out contracts, which collectively covered 81,000 pension participants. Further, the single premium buy-out assets increased 9% in the second quarter, to $169.4 billion. 

SRI Assistant Research Director Mark Paracer said in a press release that the pension risk transfers in the second quarter were the second highest on record for any second quarter regarding both the numbers of contracts sold and the dollar value.

The second quarter results were a reversal of the buyout sales in the first quarter, according the SRI; they report, however, despite the second quarter results for the first half of 2021 overall, buy-out sales came to $6 billion—11% lower than those of the first half of 2020. 

Similarly, from the first to the second quarter of 2021, there was a reversal regarding single premium buy-in contracts sold. In the first quarter, there were $2.8 billion in buy-in contracts sold; in the second, no single premium buy-in contracts were sold. 

Overall group annuity risk transfer sales in the first half of 2021 were higher than those of the first half of 2020—30% higher—and came to $9 billion. 

Paracer said that SRI projects that pension risk transfer sales will be between $25 billion and $30 billion for 2021. Metlife, in its 2021 Pension Risk Transfer Poll, notes that the pension risk transfer market in the United States grew by more than 25% between 2017 and 2019, and amounted to $27 billion in transactions—followed in 2020 by transactions of almost as much, $27 billion, in just one year. 

Metlife says that the majority of the $3.4 trillion in assets held in private-sector pension plans “is expected to be derisked in the next 10 years.” More specifically, they report that 93% of plan sponsors that plan to de-risk expect to divest all of their pension plan liabilities—a 17 percentage point jump from the percentage that expressed such a sentiment in 2019. And, Metlife says, the average amount of time by which the plan sponsors that plan to divest liabilities expect to do so is 3.7 years.

Why?

Metlife discusses a variety of reasons why pension risk transfer is taking place: 

• Actively managing a pension plan is complex and expensive. 
• It is an “exceedingly difficult challenge” to generate sufficient portfolio returns to fund liabilities in a prolonged low interest rate environment,” and this is exacerbated by market volatility due to concerns about the coronavirus and its variants. 
• Pension plan participants are living longer than they have in the past and the improvement in longevity is even more pronounced for U.S. pension plan participants than other Americans.
• Interest rates.
• Pension Benefit Guaranty Corporation premium increases, as well as changes to the ways it calculates premiums.
• The regulatory environment.
• Favorable annuity buy-out pricing. 
• Large, well-publicized annuity buyout transactions by Fortune 500 corporations, which help engender continued very strong interest in pension risk transfers.

Metlife says that many of the plans for which the plan sponsors they surveyed plan to fully divest liabilities have significant assets.