Defined benefit plans continue to explore asset strategies for their pension de-risking journey, including pension risk transfers to group annuity solutions. Moreover, the Covid-19 outbreak and ensuing market volatility has led to more interest in preparing for such transactions in advance and transferring assets-in-kind (AIK).
“An assets-in-kind transfer is when a plan sponsor pays for a group annuity premium by transferring actual assets as opposed to paying for a premium in cash,” said Neil Drzewiecki, Head of Pension Risk Transfer & Institutional Actuarial in Institutional Solutions at MassMutual, speaking at Pensions & Investments’ Managing Pension Risk & Liabilities Virtual Series in October. He added that a key benefit of the strategy is potentially lower costs for the plan sponsor.
“One of the savings is the elimination of the bid-ask spread on the sale and subsequent purchase of assets by the insurer. Assets are traded at a mid-price, which could lead to a lower price for the annuity and transaction cost savings for the plan sponsor,” he said, at the session titled, ‘The Pension De-Risking Journey: What Assets should I be Holding?’ Coupled with the standardized process for AIK transfers in the industry today, plan sponsors are able to secure the benefit of AIK transfers, even some transactions with less than $100 million—a transaction size that wasn’t always viable before, he said.
The illustration [below] shows that potential impact of the interest rate risks associated with a cash annuity purchase for the plan sponsor.