U.S. corporate pension plan buyout volume should total around $25 billion in 2018, similar to the previous year's total, with corporate tax reform continuing as a major driver for transactions, a report from Aon said.
Aon's 2018 U.S. Annuity Settlement Market Update said nearly $25 billion in U.S. corporate pension plan liabilities were settled in 2017 through group annuity purchases from the 15 insurance companies that serve the market, up from about $15 billion the previous year.
The total volume of group annuity purchases since 2012 — when General Motors Co., Detroit, and Verizon Communications Inc., New York, jump-started the growth of the market by transferring $26 billion and $7.5 billion, respectively, to Prudential Life Insurance Co. of America — is about $100 billion in settled pension liabilities.
For 2018, Aon expects a similar year to 2017. Ari Jacobs, senior partner and global retirement solutions leader at Aon, said in a telephone interview that "we see similar activity this year as we did last year." This is based on the drivers for group annuity purchases being similar to last year.
Because a higher funding ratio increases the ability of a U.S. corporation to purchase a group annuity contract, the major drivers are corporate tax reform and Pension Benefit Guaranty Corp. premiums. Both have spurred corporations to accelerate the contributions to their plans, which in turn greatly improves their funding ratios and motivation to do a that pension buyout.
The Tax Cuts and Jobs Act, signed into law by President Donald Trump on Dec. 22, reduced the corporate tax rate to 21% from 35%. Current tax law allows a plan sponsor to deduct a portion of its pension contributions based on its tax rate. Corporations have until Sept. 15, the final tax deadline, to deduct those contributions at the higher 2017 rate. Also, the PBGC's variable rate is based on the unfunded obligations in a defined benefit plan. The variable rate, which was as low as $9 per $1,000 of unfunded vested benefits as recently as 2013, is $34 in 2018 and will rise to $42 in 2019.
Aon also said "select retiree" annuity liftouts will continue to dominate the market in 2018, similar to the last two years. These are transactions in which a specific population of retirees' benefits are transferred. This might be, for example, transferring retirees with a low monthly benefit in order to reduce headcount in the plan, which reduces administrative expenses along with the PBGC's fixed-rate premium. That premium is measured per participant. In 2012, that premium was $35 per participant, but is now $74 and will increase to $80 in 2019. Fewer participants mean smaller premiums, and companies' incentives to reduce the number of participants increases every year.
The update also mentioned there is more competitiveness in the pricing of premiums among insurance companies as the market has increased to 15 from eight insurance companies in 2012. The pricing for retiree transactions ranged from 100% to 106% of projected benefit obligations during 2017, which is a slight downward trend.
While the higher number of players in the market has contributed in some part to a trend of lower premiums, Mr. Jacobs said "not only have there been an increasing number of insurers, the insurers have become more focused on particular segments of the market," whether that's the size of transactions or nature of the transactions.
He noted "not all of them are bidding on everything, and they're being more selective and determined on particular markets."
The market update is available on Aon's website.