Trends in the PRT market

During a panel discussion at Pensions & Investments’ 2024 Pension Derisking Conference in October, Ian Cahill, head of pension risk transfer at Massachusetts Mutual Life Insurance Co. (MassMutual®), discussed many key trends in the PRT marketplace. We recently caught up with Cahill to follow up on his comments at the conference, and how MassMutual is well positioned to support growing PRT market needs.

Key trends

PRT transactions have gained tremendous popularity as a form of derisking, reaching $45.8 billion in new sales in 2023 as reported by LIMRA.¹ Against a backdrop of favorable market conditions and improved pension funded statuses, corporate defined benefit plan sponsors are well positioned to evaluate and pursue pension derisking paths, and are doing so through a PRT, according to Cahill.

As the volume of PRT transactions has grown over the past decade, plan sponsors have become increasingly knowledgeable about the solution — propelling interest further. More corporate plan sponsors are familiar with and show greater intent to execute PRT transactions. Many plan sponsors have even completed multiple transactions and know how the process works, from pricing and execution to administration, Cahill said. “This has made plan sponsors more comfortable with the opportunity, and it is also driving growth in the PRT market.”

Moreover, PRT transactions are getting larger, including some that are quite complex. “We’re seeing many more requests for plan terminations, and for increasingly larger plans that are hundreds of millions of dollars and more in size,” he said. While plan sponsors are considering the full range of PRT strategies, including partial lift-outs, “more plan sponsors are focused on full-plan terminations than in the past.”

Another trend is a widening array of plan provisions. “Today we’re seeing more transactions that have greater complexity in terms of the provisions that are offered to plan participants. Insurers need to be in a better position to price, underwrite and provide administration,” Cahill said. The growth in plan terminations has also led to other considerations, such as asset-in-kind funding and longer timelines, as the sponsor may have less control over timing but further foresight of the transaction.

Handling complex plan provisions

In an evolving PRT market that serves increasingly complex plan provisions, an insurer’s administrative capabilities have become even more prominent, particularly with plan terminations. “It’s important to have an insurer who has experience handling complex plan provisions and understands how to provide the information, services and resources that annuitants need through both a dynamic call center and online with a robust digital solution,” Cahill said.

Given the years of experience that plan sponsors have had with regulated traditional pension plans subject to ERISA, many may find themselves less familiar with the capabilities and industry standards for insurance products. Cahill highlighted that insurance companies too have competitive administrative solutions and work within a regulatory framework that addresses both the financial and operational aspects. “This is a heavily regulated industry, and we work to meet or exceed the individual state requirements where we do business, including making sure that we provide annuitants with appropriate levels of contact, service and support,” he said.

While the regulations provide requirements and industry standards, it’s not why MassMutual strives to offer robust administrative and digital capabilities, he explained. “At MassMutual, helping people secure their future and protect the ones they love is core to our mission and purpose,” Cahill said. “We monitor the annuitant experience — how are they interacting with us, what transactions interest them most, and so on. Their activity and feedback influence how we shape our capabilities over time.”

MassMutual’s administrative platform integrates existing and new technology to support all its PRT clients. “We continue to grow our call center, which is the main method used to interact with our annuitants, and we continue to invest in the technology used to support their needs and provide the best experience possible,” Cahill said. “We also continue to develop our digital service offering to annuitants currently using it as well as to be prepared for more annuitants, who we expect will use that method over the next five, 10 and 15 years. We believe we offer among the most robust annuitant administrative capabilities available in the PRT space.”

Managing private assets

As market demand has increased and pension liabilities are transferred to insurers, it’s become incumbent on insurers to view each potential PRT transaction holistically, as opposed to in generalities, Cahill said. “As more corporate plans come to market, we’re seeing the need for more thoughtful resource allocation by insurers when pricing and underwriting those risks.”

As an example, he added: “In situations where a plan sponsor is looking to transfer assets-in-kind as a method for paying the PRT premium, we’ve generally received traditional fixed-income portfolios. But today we’re also seeing plans that have larger allocations to private assets, and there have been instances where there’s a request to use the private assets to cover a portion of the premium as well.”

With the growth of private assets in defined benefit plan portfolios, these types of asset-in-kind premium requests were inevitable, Cahill said, especially for plan terminations. “We’re seeing the request to settle private assets more often, and it becomes a more sophisticated conversation than it’s been in the past.”

Ultimately, an asset-in-kind transfer can be a win-win for the insurer and the plan sponsor alike, but there are complexities involved in accepting private assets to cover all or a portion of the cost of a premium, he said. Documentation that provides details on each specific asset is essential in these cases during the pricing process to ensure a sustainable and competitive bid. “It’s helpful for the plan sponsor to understand what the insurer needs and have it readily available, so the insurer can evaluate which assets they’ll accept in kind as part of the premium. The less liquid the asset, the more challenging it is to work through the process of agreeing on the asset’s value.”

Insurers want to understand the protections and covenants that are negotiated into the assets, Cahill said, and that can be a major consideration for private assets. Insurers “may be looking for structures similar to what they already have on their books, and plan sponsors need to be prepared for a broader discussion around the asset and its structure, not solely on market value and yield.”

A mutual, long-term view

To stay ahead of the evolving PRT market, MassMutual has continued to invest in its PRT business. “We continue to invest in our people and our products to ensure we are able to support the increase in demand and complexity as well as place ourselves in a position to execute what is promised,” Cahill said.

Also, MassMutual’s focus on annuitants is deeply rooted in its culture as a mutual company. “Our participating policyholders are our owners, and their No. 1 long-term objective is our enduring viability and sustainability, as opposed to a focus on short-term outcomes,” he said. “With this objective, we take a long-term approach to managing our business. This has enabled us to deliver strong results for our participating policyowners and customers while maintaining financial strength ratings that are among the highest in our industry. With our focus on annuitants, our mutuality, and our financial strength, MassMutual is well poised to continue supporting market demand.”²