Pension buyouts have been in a lull so far in 2013, but insurers and consultants expect a rush by corporate defined benefit plans in the next several years.
That's because expectations of rising interest rates plus improved funding ratios for many plans will make it easier and less expensive to sell their liabilities to insurers, sources said.
Executives at annuity providers like Newark, N.J.-based Prudential Financial Inc. and Metropolitan Life Insurance Co., New York, expect a total of $2 billion to $5 billion in buyouts by the end of 2013. Year to date there's been about $1 billion in activity, but corporate plans historically ramp up their decisions on pension buyouts in the last quarter.
Glenn O'Brien, managing director and head of U.S. distribution and client management for pension risk transfer at Prudential in New York, said he expects about $2 billion in pension buyouts in 2014, possibly reaching $3 billion. ”We think $150 billion in five years could get done.”
Ed Root, vice president of U.S. pensions at MetLife, said several “super jumbo” pension plans could be in a position to do an annuity transaction in 2014, but he wouldn't name the plans. He also expects an average of $20 billion in pension buyout deals annually over the next 10 years.
So far this year, buyout activity has been average compared with the last 10 years, but far below the heady days of 2012, when high-profile pension buyouts at General Motors Co. and Verizon Communications Inc. propelled the liability annuitization market to about $37 billion for the year.
“The market won't rebound to $37 billion this year,” said Richard McEvoy, partner and leader of Mercer LLC's U.S. financial strategy group, New York. “The market hasn't taken off, and (current) interest rates have a lot to do with this, but sponsors take a while to get their act together. They're talking about it.”
“We knew, especially after Verizon and everything else, that 2013 was going to be a disappointing year,” Mr. O'Brien said. “But (executives at large plans) know they can get it done, depending on their funded status.”
Said Donald Stegall, financial adviser in the Paramus, N.J.-based Napolitano Group at Morgan Stanley: “Once the dam breaks, there's going to be a huge flood of pension buyouts.”