Also as a result of MAP-21, variable PBGC premiums, which are determined by the level of a plan's underfunding, have skyrocketed. As recently as 2013, the rate was $9 per $1,000 of underfunding, and is now $34 per $1,000 of underfunding and will rise to $38 in 2018.
As that premium hike looms, more plans in 2017 have also accelerated contributions to their plans, which not only improves the funding of the plans and thus lessens the impact of those premiums, but also make it more feasible to execute pension risk transfer transactions.
International Paper, for example, announced earlier this year it made a $1 billion debt offering to fund a $1.25 billion contribution to the U.S. pension plan by Sept. 15, shortly before its buyout, and Hartford Financial Services Group Inc., Hartford, Conn., contributed $300 million to its DB plan to enable the transfer of $1.6 billion of its $5.65 billion in liabilities.
The Pension Protection Act of 2006 required an 80% funding ratio to be able to offer a lump sum to terminated vested participants who have yet to retire.
For group annuity purchases, many companies aim for a funding ratio above 100% to pay for the premium charged for such transactions.
“The possibility of corporate tax reform is one that has driven a couple of our clients in particular to fund the plan now,” Mr. Nankof said. Current tax law allows a plan sponsor to deduct a portion of its pension contributions based on its tax rate, so if the rate is 35% in 2017 and 20% in 2018, companies get to deduct more if the contributions are more in 2017 as opposed to 2018.
A number of corporations with large plans have issued debt to pay for large pension contributions in 2017 that would negate the minimum requirement to contribute any dollars over the next several years. International Paper, for one, contributed $1.25 billion to its plan just before its group annuity purchase, partially funded by a new $1 billion debt offering.
For pension plans with funding ratio below 100%, one element that has sometimes the sponsors from executing group annuity purchases is the premium risk inherent in those transactions. The premium charged by insurance companies can be as much as 5% over the projected benefit obligations that the company is transferring, but that could change as the number of insurance companies providing these services grows.
Mr. Nankof cited one unidentified recent transaction with which Rocaton was involved. “Pricing on that was below PBO,” Mr. Nankof said. “The conventional wisdom is that these transactions for retirees may go (for) as much as 5% premium to PBO. This is one where it went off to a discount to PBO. Something I've not seen. … It could be aggressive pricing or this could be very specific underwriting of this population. It could be the industry.”
“That could drive pricing higher or lower. I don't want to suggest this is a data point. It's not a big pool of plans where I'm saying pricing is coming below PBO in general. It's a specific case. I think for some plans, (premiums could come down) depending on the participant pool, the industry and how aggressive the bidders are,” Mr. Nankof said.
The bidders are represented by the 15 companies that currently offer pension risk transfer services. It is a small pool, but as Mercer's Mr. McDaniel notes, that market has doubled in the past few years from about eight insurance companies, so the competitiveness of the bidding process could indeed grow.
“That means better costs and better outcomes for plan sponsors,” Mr. McDaniel said. “I think it will be interesting to see over the coming years to see what the equilibrium number of insurers in that market will be. Wherein there's going to be a lot of activity, but it's a market where insurers target specific liability types, specific transaction sizes.”
“The competitiveness with which any given plan sponsor will see their liability bid really depends on the demographic profile of their plan,” said Mr. McDaniel.
“It depends on what participants they're looking to transfer (and) the complexity of the plan design,” he added.
The most frequent form of pension risk transfer has been lump sums to former employees vested in the plan but who have yet to retire. The Internal Revenue Service recently unveiled their long-awaited updates to their mortality assumptions, which affects the calculation of those lump sums.
The surprising part of the announcement, some experts say, is how late in the year the IRS chose to make it. “That has a few plan sponsors scrambling with the shortness of time to make that adjustment,” Mr. McDaniel said. “The immediate impact of that (regulation) makes lump sums less attractive for the plan sponsor, so you have to pay out lump sums that might be 4%, 5% higher than the old (assumptions).”
“It's less cost-effective for you as a plan sponsor now than it was in 2017,” Mr. McDaniel said. “It's not to say it's not cost effective, even with the new mortality update. It's a pretty fair deal for plan sponsors.”
What appears not to be happening is a rush to make lump-sum offers before those new assumptions take effect in 2018.
“(Lump sums are) losing momentum in terms of popularity because most organizations have already done them,” Mr. Jacobs said. “What's now happening after the mortality table changes, it's not that the popularity has waned, it's that everyone's done them.”
The high volume of pension risk transfer transactions has been expected, although the market has lacked the kind of megadeals that some have expected in the past five years.
It was five years ago, in the fourth quarter of 2012, that $34.5 billion in U.S. pension liabilities were transferred to insurance companies. Almost the entire volume came from two megadeals: General Motors Co., Detroit, and Verizon Communications Inc., New York, which transferred $26 billion and $7.5 billion, respectively, to Prudential.