Captive thinking: A new frontier in pension risk transfer 

In 2025, Memorial Sloan Kettering Cancer Center (MSK) received a Department of Labor (DOL) Prohibited Transaction Exemption (PTE) to terminate its defined benefit pension plan via a captive insurance company. To the best of our knowledge, this is the first transaction of its kind approved in the US. This approach offers a potentially more cost-effective and efficient strategy for pension risk transfer, particularly relevant for plan sponsors with frozen plans in surplus and significant allocations to illiquid assets.

Our paper explores MSK’s experience to offer insights that may be applicable for other sponsors seeking new solutions to settle pension obligations. Key points:

• There may be financial benefits to a company for conducting such a transaction. For MSK, savings¹ are estimated to be in excess of $120 million² for a plan with around $1.3 billion in assets. Participants may also benefit as a condition of the deal because half of the savings must be used to increase their pension benefits. Moreover, MSK is able to immediately access its approximately $270 million pension surplus³ as the plan must be terminated for the transaction to proceed.
• For plans with difficult-to-value features and significant allocations to illiquid assets, the captive approach may be appealing. This is because in these situations, favorable annuity pricing relative to a commercial insurance carrier may be achieved. Additionally, illiquid assets might not necessarily need to be sold at a discount in secondary markets because regulations governing captive insurers may allow for these types of holdings. Plan sponsors also need to be comfortable retaining the pension risk, as they must ultimately backstop any shortfall at the captive.
• For plan sponsors who are not in a surplus position, have straightforward liabilities, retiree-heavy populations, minimal illiquid assets, and are not keen to deal with the time commitment and complexity of a captive, this option is perhaps less likely to be of interest. 
• Plan sponsors considering the use of a captive should analyze this solution in comparison to viable alternatives, including standard termination and retaining the risk by keeping the plan.

Download our paper  to uncover the detailed structure and implications of the MSK transaction, along with an analysis of the potential benefits and challenges of adopting this approach.

If you’re interested in exploring plan termination through a captive insurance company or want to learn more about other pension risk transfer solutions, we’d be happy to discuss how we can support your needs. Contact us today.

Please see important notices

_{¹ Measured as the difference between purchasing annuities from a commercial carrier via a standard plan termination versus purchasing annuities from a commercial carrier and reinsuring the risk through the company’s captive}

_{² Not a Mercer estimate. Source: "Exemption from Certain Prohibited Transaction Restrictions Involving Memorial Sloan Kettering Cancer," Federal Register, January 15, 2025, https://www.federalregister.gov/documents/2025/01/15/2025-00813/exemption-from-certain-prohibited-transaction-restrictions-involving-memorial-sloan-kettering-cancer}

_{³ Based on December 31, 2023 Memorial Sloan Kettering Cancer Center financial statement; not necessarily the surplus under a plan termination liability calculation.}