Pension Risk Transfers Red Hot

Pension risk transfers (PRTs) have heated up, according to recent reports, and industry experts offer explanations why plan sponsors are particularly interested in them now. 

Highest Ever for Q2

PRTs in the United States in the second quarter of 2023 were the highest for any second quarter LIMRA has measured, it reports in its latest U.S. Group Annuity Risk Transfer Sales Survey. 

LIMRA reports that U.S. PRTs amounted to $16.2 billion in the second quarter. That was higher than any second quarter they had measured, and it was a whopping 31% higher than the second quarter in 2022. Similarly, in its U.S. Pension Risk Transfer 2023 Mid-Year Update, AON reports that PRTs in the second quarter amounted to $16.1 billion. 

LIMRA also reports that single-premium buy-out sales in the second quarter were the highest they had measured for any second quarter, and came to $14.6 billion—18% higher than the second quarter one year before. 

Hottest Year So Far

The heat generated by pension risk transfers in the second quarter is part of the trend that has held sway since New Year’s Day, LIMRA further reports. 

They say that in the first half of 2023, PRT sales came to $22.5 billion, 28% higher that those of the first half of 2022. Mark Paracer, assistant research director of LIMRA annuity research, in a press release attributed the results for the first half of 2022 to record sales, as well as “robust growth in contracts,” which he said is “a newer trend.”

But LIMRA is not alone in finding that the first half of 2023 was a hot time for PRTs. AON says it found that in the first half of the year, the PRT market “saw its highest ever volume of premium and number of transactions placed” and reported a sales figure almost equivalent that LIMRA did: $22.4 billion. 

AON reports that not only did the number of transactions go up, so did the volume of premiums for lift-outs and plan terminations, a phenomenon they attribute to several large market transactions. And they say that half of the transactions in the first half of 2023 were plan terminations.

Longer-Term Trend

This is part of a longer trend, LIMRA suggests. They reported that PRTs in the first quarter of 2023 were the highest for any first quarter it measured, as well. They say that U.S. single premium PRT sales came to $6.3 billion. 

Milliman goes further. They reported that PRT market activity “broke records” in 2022, based on single-premium transactions amounting to $51.9 billion, $12.2 billion more than in 2021.

Why?

Annuities and Funding Levels. Annuity purchase interest rates, as well as improved pension plan funded status, help explain the significant rise in PRTs, says October Three. Those factors “are driving plan sponsors to settle all or a portion of their pension liability,” it says in a recent report. 

Insurers. October Three notes that insurance companies have reported higher annuity inquiries in 2023. “This year, insurers have experienced a consistent rush,” they add. In addition, Aon reports that the number of PRT market insurers has grown in 2023, and that increased competition among them resulted in improved transaction pricing and new options—and as a result, plan sponsors have sought PRTs. 

Lower Plan Costs. Cost savings are another explanation October Three cites for higher PRTs, since they can be attractive to an employer. They observe that PRTs transfer liability and reduce administrative costs for a plan since PRTs reduce the number of participants. Further, PRTs reduce plan liabilities and also result in lower premium payments to the Pension Benefit Guaranty Corporation.

Crystal Ball 

October Three suggests that there is more to come. “This year is on track to be a record year” for PRTs, they say, as funding levels continue to improve and annuity purchase costs become more attractive. And they add that insurers expect that they will continue to receive a high number of annuity inquiries for the rest of the year.