Plan Sponsors Embrace Pension Risk Transfers

Reportedly, there has been a surge in pension risk transfer (PRT) activity—and plan sponsors' interest is part of the reason why.

According to the U.S. Pension Risk Transfer (PRT) report Aon released March 20, there was sharp growth in PRT activity in the fourth quarter of 2023. And so far this year, they say, the U.S. pension risk transfer market has grown 36%.  

PRTs usually involve buying annuities from a life insurance company to pay lifetime retirement benefits to at least part of a retirement plan’s participants, explain Jason Russell and Seth Almaliah of Segal in a recent blog entry.

Ongoing Trend

The growth in the number of PRTs is not a new trend. Aon has reported that PRTs increased 28% from 2021 to 2022; not only that, PRTs in 2022 amounted to $52 billion, which they said early in 2023 was “the highest Aon has recorded in a decade.” One of them—that concluded by IBM in September 2022—they cited as the second largest PRT transaction in U.S. history up to early 2023. 

Legal & General Retirement America in late 2023 had anticipated that the PRT market would continue to be “promising” and suggested that if some of the deals whose closure was possible early in 2024 came to fruition, the first quarter of this year could be “unparalleled” regarding PRTs and that the entire year could be “strong” as well.

Sure enough, on Feb. 7, 2024, Shell USA, Inc. closed a PRT worth $4.9 billion with Prudential Financial, Inc. Chief Investment Officer reports that according to Shell’s Form 5500, its pension plan had assets of $14.468 billion by the end of 2022. And on Feb. 29, Verizon Communications Inc. filed information with the Securities and Exchange Commission (SEC) that reports that the company completed a PRT of almost $6 billion.

These two deals alone “have significantly increased the premium volume” for the first quarter of 2024, says October Three—which they say is especially noteworthy since the early quarters of the year are “traditionally a slower time.” 

Plan Sponsors’ Embrace

Plan sponsors are part of the explanation for the growth in PRTs. Aon, in its 2023 report on the U.S. Pension Risk Transfer Market, says that plan sponsors—regardless of size—in 2023 continued to pursue PRTs as a way to reduce plan liabilities and volatility in finances. Segal’s Russell and Almaliah also write that some plan sponsors are pursuing PRTs as a means of de-risking in order to attune plan investments and liabilities. 

Opportunity 

Trends can expand opportunity—and that includes PRTs. 

Russell and Almaliah argue that the current high interest rate levels present opportunities to lessen plan risk that had not been available before. They suggest that plan sponsors might find it useful to think about and analyze de-risking as a way to better serve participants and better anticipate costs going forward. 

October Three also argues that PRTs have a role to play with costs. This, they say, is because with PRTs (1) plan administration costs fall, (2) overall plan liability falls because the plan is smaller and plan risk is lower, and (3) premiums paid to the Pension Benefit Guaranty Corporation are lower because the number of participants is lower.