Gauging the Insurer Appetite for Annuity Buy Outs and Plan Terminations
Q : Is the Insurance industry appetite for buying group annuity contracts a new thing?
Lynn Esenwine: Pension risk transfer is not new — the purchase of group annuity contracts has been taking place for several decades. But a lot has changed since 2012, when General Motors and Verizon transacted their multi-billion dollar risk-transfer deals. At that time, there were roughly five to seven insurance companies regularly competing in the business. Today, we have more than 10 to 14 insurance companies that are underwriting group annuities, and some are looking not only at retiree buyouts but also at plan terminations.
Q : More and More Plan Sponsors are looking to Transfer Pension Risk Given Increasing Pension Benefit Guaranty Corporation Premiums and New Morality Tables Reflecting Increased Longevity. Is there Any Limit to the Capacity of Insurers to do these Deals?
LE: There are several reasons why insurance companies cannot underwrite an unlimited number of group annuity contracts. One has to do with financial capacity. Insurance regulation requires that companies hold capital against these long-dated transactions. If you are a large publicly traded company, you could, for example, raise capital to do more annuity purchases if it were a continued attractive line of business to pursue. However, smaller mutual insurance companies may not have as much flexibility around unplanned availability of financial capacity in any given year.
A question around annual insurance capacity is an ongoing consideration for sponsors that are not quite ready to transfer pension risk, but are considering it in the next three to five years. There are also considerations around administrative capacity. Most insurers do not have the ability to transition numerous clients in the same month because it is a labor-intensive process to onboard new plans to an insurance company’s platform. As you can imagine, it is critical to ensure that when the insurance company sends that first check or bank wire to a retiree, the amount has not changed from what he or she received the month prior. So there is a significant amount of administrative rigor needed to properly install every contract that is underwritten, and often times the $10 million transaction might be as much effort as a $500 million deal because there are participant communications, there are contract negotiations — these are all things that do not change based on the size of the transaction.
Q : Despite these Constraints, Appetite Among Insurers to Do Buyouts has Risen Significantly Since the GM and Verizon Deals. Do you Expect this Appetite to Continue to Grow?
LE: The bottom line is that we know that there is a big appetite today in the insurance community, but we don’t know what’s going to happen, say, three years from now. New insurers enter the market and other insurers exit after a period of time. Today we see the 10 to 14 insurers actively bidding on this business. One of the capacity considerations is around a number of large sponsors coming to market at once. Should this happen, how will the insurance community manage its broader financial capacity constraints in the short and long term? How will this large movement of liabilities impact small and mid-market plan sponsors? For many CFOs, they are simply waiting for a rise in interest rates to make their pension risk-transfer move. What happens around capacity in the market if there is a run on annuity purchases, retirees or full plan terminations?
Is the pension ecosystem ready for a run to the market — regulator, insurers, consultants, attorneys? These unknowns are driving many plan sponsors to explore the current competitive insurance market to contemplate annuities purchases now to ensure the risk is prudently managed in the future.
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