This 2024 update to the inaugural Plan Sponsor’s Guide to Pension Risk Transfer (PRT) provides key insights into why PRT solutions are critical for retirement security and the evolution of the market as insurers have stepped in to meet the demand for these transactions. In addition, this Guide offers practical guidelines to help pension plan sponsors and fiduciaries understand and implement these solutions.

I

PRT SOLUTIONS AND RETIREMENT SECURITY

According to the National Institute on Retirement Security, the retirement savings deficit is between $6.8 trillion and $14 trillion, and 45% of working households “do not own any retirement account assets.”¹ Furthermore, “90% fall short [of conservative retirement savings targets] based on retirement account balances and estimated [defined benefit (DB)] pension assets combined; 84% fall short based on total financial assets; and 65% fall short based on net worth.”¹

Pension risk transfer has been a very effective solution to help address the needs of the growing retirement population and has served to enhance retirement security.

Richard McEvoy

Senior Vice President and   
Pension Group Annuity Leader, Athene

While many people are no longer accumulating benefits under DB plans, protecting legacy obligations is a critical component of retirement security, and it is not without its own challenges. DB plans are not core to business operations for most sponsors, and many have inadequate expertise and infrastructure to manage the related investment, longevity and operational risks. Meanwhile, the Pension Benefit Guaranty Corporation (PBGC) is considerably limited in its ability to provide security for American retirees covered under pension plans, with only three tools for solvency: premiums from a shrinking base of plans, benefit cuts, and investment earnings.

“Pension risk transfer has been a very effective solution to help address the needs of the growing retirement population and has served to enhance retirement security,” said Richard McEvoy, Senior Vice President and Pension Group Annuity Leader, Athene. Plan sponsors have transferred $318 billion of pension obligations to insurers since 2012, according to research by Aon. ²

“It’s no surprise that corporations look to life insurers for help managing their long-term pension obligations,” Susan K. Neeley, president and CEO of the American Council of Life Insurers, recently wrote.³ “By removing pension risk from their balance sheet, America’s businesses can focus on what they do best: innovating, competing and providing jobs for hard-working Americans. And retirees can rest assured that their hard-earned pensions are being safeguarded by the most experienced managers of longevity risk, U.S. life insurers.”

Serving a Growing Societal Need

Notes:   
¹ United Nations, World Bank.   
² Willis Towers Watson “2023 Global Pension Asset Study.” National pensions included are Australia, Canada, Japan, Netherlands, Switzerland, U.K., U.S.   
³ As of December 2023. Average five-year CD from select U.S. regional banks per BankRate (COF, ALLY, BMO, CFG). Returns as shown are after tax, assuming the highest federal income tax rate of 37%. Athene MYGA return is without tax given its tax-deferred nature.   
Source: Athene.

To support this healthy trend, the insurance market needs to source capital required to protect retirees’ benefits and, unlike pension plans, insurance companies are required to hold capital in excess of their liabilities. In addition, insurers also need to access a diversified array of long-term investment-grade fixed-income investments without increasing investment risk. “Alternative asset managers, and Athene in particular, are well equipped to meet these dual needs of sourcing capital and safe yield,” McEvoy said.

 

Data Sources: Secure Retirement Institute^®®, U.S. Group Annuity Risk Transfer Quarterly Survey – 4th Quarter 2023, Buy-Out and Buy-In transactions. Breakdown of transaction types based on Mercer “2023 Pension Risk Transfer Market Update,” https://www.mercer.com/assets/us/en_us/shared-assets/local/attachments/pdf-2023-us-db-prt.pdf.

The insurance market has stepped up to provide increased capacity in order to meet the increasing demand for PRT in recent years, with the number of insurers offering PRT doubling to more than 20 insurance companies in the U.S. market today. The market capitalization of the top 10 PRT insurers is more than $200 billion and this group currently provides more than $140 billion of capital to the life and annuity industry, according to the Life Insurance Marketing and Research Association (LIMRA). ⁴

Market Capitalization for Top 10 Pension Group Annuity Writers in 2023

Notes: As of March 24, 2024. Seven of the top 10 U.S. pension group annuity writers in 2023 per the Life Insurance Marketing & Research Association (LIMRA). Represents APO market capitalization. MassMutual, Pacific Life and Nationwide (which are also top 10 PGA writers) are not included as they are not publicly traded companies.   
Source: Apollo.

II

PRT TRENDS AND FUTURE OUTLOOK

This section provides insights on key PRT market trends and the outlook for plan sponsors, insurers, regulators and other stakeholders.

 

Plan Sponsors   
Improvements in funded status  
The PRT market has surged in recent years as corporate pension funds have sustained solid improvements in funded status. In 2023, the recent improvements in funded status gains were sustained with approximately 48% of corporate pension plans over 100% funded and 25% over 110% funded.¹

Over the past two years, despite the market volatility, many plans reached and sustained full funding due to the impact of rising rates on liabilities, enabling larger strategic PRT transactions.

Richard McEvoy

Senior Vice President and   
Pension Group Annuity Leader, Athene

Many sponsors are now better positioned to lock in participant security through PRT transactions that move pension liabilities off their balance sheets and over to insurers that guarantee the payment of the pension benefits. This market evolution has driven insurers to develop the investment capabilities, capital sourcing strategies and solutions to meet the growing needs of corporate sponsors.

Improving Funded Status

Sources: Milliman “2021 Corporate Pension Funding Study” for Dec. 31, 2020 data and Milliman “2024 Corporate Pension Funding Study” for Dec. 31, 2023 data.

Historically, most PRT transactions have been driven by a desire to reduce administrative expenses, such as PBGC premiums, with a focus on incremental and often smaller transactions for segments of the retired population. However, as many plans have become fully funded, there has been growth in full-plan terminations — whereby benefit obligations are fully transferred to an insurer for all segments under the plan, including both retirees in-pay and deferred participants.

Data Source: Mercer “2023 Pension Risk Transfer Market Update,” https://www.mercer.com/assets/us/en_us/shared-assets/local/attachments/pdf-2023-us-db-prt.pdf.

Plan terminations bring added complexity, with the need to coordinate financial risk management with a lengthy regulatory timeline. However, a plan sponsor can secure annuity pricing certainty in the initial stages of plan termination through a buy-in, thereby helping eliminate a significant source of risk early in the process.

We are expecting continued growth in larger and more complex transactions, including full-plan terminations where all benefit obligations are transferred to an insurer.

Kelly Kearns

Vice President, Pension Group Annuity, Athene

Read: The Case for Annuity Buy-Ins

The majority of plans that have completed significant PRT transactions are closed to new participants or fully frozen with respect to existing participants. IBM is a notable exception that executed a $16 billion PRT transaction in 2022 and then reopened its plan in 2023.² This combination of effective risk management of legacy obligations and enhancing and securing future retirement benefits of current employees may be a trend others will follow.

Plan sponsors are increasingly evaluating ways to utilize surplus pension assets, whether planning for pension exit and/or other measures.

Read: The Pertinent Topics Impacting the Retirement Industry

Insurers  
Insurers’ capital and operational capacity   
Given that a substantial increase in corporate sponsors’ demand for PRT is expected to continue, insurers need to continue to adapt and raise capital to meet the demand. Given the long-term nature of PRT commitments, several alternative asset managers have provided much needed capital and investment capabilities spanning a broader, more diversified range of long-term assets than historically enabled by legacy insurers.

In addition to capital capacity, insurers continue to invest in and scale their operational capabilities to absorb the next wave of transactions, which will undoubtedly include deferred lives, with some insurers outsourcing administration to the same third-party providers that many plans are already using.

Investment diversification  
The fixed-income investment landscape has evolved due to broad demand for more income, yield and diversification, driven by demographics and capital markets. This has led insurers to invest more in private markets, where they can generate excess return through high-quality assets without taking incremental credit risk, and which allows them to meet their beneficiary return obligations.

For Athene and Apollo — which merged in 2022 — expansive origination platforms lower intermediation costs and enable greater underwriting control and structural protections of the underlying assets, McEvoy said.³ These advantages in fixed income investing generate enhanced and diversified returns with lower impairments than its insurance peers, supporting favorable PRT economics for the plan sponsor and benefit security for retirees, he added.

Read: Understanding Structured Credit

Regulators and Other Stakeholders   
Increased regulatory focus   
As the volume of PRT transactions has increased in recent years, interest among regulators has increased. One notable area of focus relates to the Department of Labor (DOL) report on Interpretive Bulletin 95-1 (IB 95-1) that provides guidance to fiduciaries on the process and criteria for determining the “safest available” PRT insurer. DOL and its Employee Retirement Income Security Act (ERISA) Advisory Council (EAC) spent much of 2023 evaluating IB 95-1.

Athene submitted public comment and testified before the EAC regarding this matter in 2023. In its public comment letter, Athene noted the historic success record of IB 95-1 and urged DOL to maintain its principles-based guidance, noting that this approach has allowed for changes in business practices that have enhanced participant security, including reinsurance and separate accounts. The DOL’s Employee Benefits Security Administration (EBSA) issued its final report in June 2024, largely supporting the existing guidance. EBSA concluded that IB 95-1 “continues to identify broad factors that are relevant to a fiduciary’s prudent and loyal evaluation of an annuity provider’s claims-paying ability and creditworthiness.”⁴ Due in part to the complexity of the issue, EBSA indicated that they are “not prepared at this time to propose amendments.”⁵

Involvement of other stakeholders   
Liability-driven investment (LDI) and PRT strategies have been deployed in tandem over the years as measures to reduce pension risk incrementally when plans were underfunded. With larger transactions now being considered, including plan terminations, more pension sponsors are electing to settle their obligations rather than continuing to maintain LDI programs.

This shift will impact the pension investment players, in particular long fixed-income managers, according to McEvoy. For years they experienced tailwinds of increasing fixed-income allocations and higher revenues from asset values driven by the bull market. Now, those trends are reversing with rising rates and as pension sponsors move to the insurance phase of their lifecycle.

With this development, detractors of PRT insurers have emerged among incumbents. One detractor has posited that the safest available designation under the DOL’s IB 95-1 should be anchored to credit spreads for Funding Agreement Backed Notes (FABNs). Athene believes this argument is fundamentally flawed and provided supporting analysis in its public comments to the ERISA Advisory Council as part of their review of IB 95-1. Agilis, an adviser to independent fiduciaries, has taken a similar view to Athene.⁶ Notably, the recent DOL report on IB 95-1 makes no mention of utilizing credit spreads as a guiding metric for insurer claims-paying ability.

“It is crucial for sponsors and fiduciaries to separate signal from noise by performing rigorous independent and data-based due diligence on their insurance counterparties with the assistance of independent fiduciaries and independent experts with their insurance advisers,” said Sean Brennan, Executive Vice President of Pension Group Annuity and Flow Reinsurance, Athene.

III

BENEFITS FOR PARTICIPANTS

Under ERISA, plan sponsors are required to structure a PRT so that the insurer provides matching plan options and benefit levels, with no reduction in benefits.

PRT retirees have numerous layers of protections provided by the insurer that holds the responsibility of providing their plan benefits: thick buffers of capital, asset-liability matching requirements, separate account protections, as well as a high degree of regulatory and fiduciary oversight. Each of these is individually highly unlikely to be compromised for any insurer that has undergone the rigorous fiduciary review required for PRT transactions. All of these protections would have to fail for any retiree to lose benefits.

In no way, shape or form are participant benefits cut through a PRT transaction.

Karen Braga

Vice President, Legal, Athene

PRT participants and policyholders have absolute priority over other sources of insurer funding, which are available to absorb financial stress.

Priority Level of PRT Participants and Policyholders

Source: Athene

Regulatory capital and fiduciary requirements   
Insurers are in the business of securing the obligations they underwrite as their number one priority. Unlike pension plans, insurers hold regulatory capital to safeguard their ability to keep commitments to policyholders, with oversight and standards enforced by insurance regulators and rating agencies. The mandatory capital buffers, combined with rigorous asset liability management, result in a highly secure financial position guarding commitments to retirees.

As illustrated below, a market dislocation several times the size of a deep recession, defined as a Lehman Brothers-type crisis, would be required to eat through the capital buffer typically provided by PRT insurers — and that just gets to the potential first dollar lost by participants before other protections kick in. “This illustration is a helpful antidote to the misinformation we see in the PRT market and highlights how PRT retirees can have peace of mind with regard to their retirement security,” said Kelly Kearns, Vice President, Pension Group Annuity, Athene.

Strong Capital Protects Participants in Even the Most Adverse Scenarios

¹ Broadly based on Athene’s stress testing results, with further detail in Section IV.   
Source: Athene

Separate Accounts   
Separate accounts are another measure taken by some insurers to protect PRT annuitants. By holding assets that back annuity liabilities in separate accounts that are insulated from general account claims, PRT annuitants are provided key structural protections and another layer of security.

Read: Oliver Wyman comment on IB 95-1

Separate account policyholder obligations are backed first by separate account assets. General account assets provide an additional layer of protection. Any separate account claims on general account assets have an equal priority with all other general account policyholder obligations. This creates multiple layers of protection — first with separate account assets, then with general account assets.   An illustration of the relative impact of separate account protections is shown below.

General Account to Separate Account Comparison

Note: Simplifying assumptions: GA and SA are the same size; GA and SA have the same 90% funded ratio at the time of failure; recovery from general account formula is slightly more nuanced but has minimal impact on the numbers shown.   
Source: Athene

Separate account protections can vary in structure across insurers and provide different degrees of security to participants. For example, reinsurance arrangements can be used to further enhance participant security by creating an obligation for an insurer to top up any separate accounts deficits that arise on the portion reinsured. Such reinsurance protections would help recover a material portion of any losses incurred by separate account policyholders compared with policyholders that do not have these safeguards.

Benefits of PRT to Participants Relative to Pension Plan Protections

Chart footnotes:  
¹ Average rating of companies that have entered into pension risk transfer transactions with Athene.   
² 97% of AFS fixed maturity securities rated NAIC 1/2 as of Dec. 31, 2023.  
³ Financial strength ratings for Athene Annuity & Life Assurance Company, Athene Annuity and Life Company, Athene Annuity & Life Assurance Company of New York and Athene Life Re Ltd. S&P, Fitch, AM Best and Moody’s credit ratings reflect their assessment of the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. S&P rating as of January 2024 (A+, 5th highest out of 21), Fitch rating as of September 2023 (A+, 5th highest of 19), AM Best rating as of June 2024 (A+, 2nd highest of 16) and Moody’s rating as of July 2023 (A1, 5th highest of 21). Athene Holding Ltd.’s credit rating is A-/A-/a- for S&P, Fitch and AM Best, respectively.   
⁴ As of Dec. 31, 2023. Represents the aggregate capital of Athene's US and Bermuda insurance entities, determined with respect to each insurance entity by applying the statutory accounting principles applicable to each such entity. Adjustments are made to, among other things, assets and expenses at the holding company level.   
⁵ The individual subsidiary insurance company is responsible for meeting its ongoing insurance policy and contract obligations. Athene Holding Ltd. is not responsible for meeting the ongoing insurance policy and contract obligations of its subsidiary insurance companies.   
Source: Athene

PBGC Benefit Cuts Versus a Perfect PRT Track Record

¹ The Morning Call, 2003.   
² PLANSPONSOR, 2004.   
³ PBGC, 2020.   
⁴ U.S. Government Accountability Office, 2012.   
⁵ Forbes, 2010.   
⁶ PBGC, 2020.   
⁷ National Organization of Life and Health Insurance Guaranty Associations Report, 2016  
Source: Athene

IV

CONSIDERATIONS FOR PLAN SPONSORS

While equity markets have performed well in recent years, pensions have continued to contend with pronounced volatility due to under-hedged interest rate risk. Volatility in pension funded status is a burden that many sponsors no longer want to bear, particularly as many pensions are now at, or near, fully funded status.

In addition, as the PRT market has become more competitive in recent years, plan sponsors have seen economic benefits through lower transaction clearing prices. Further, as insurers collaborate more with asset managers, the investment and diversification opportunities, especially in private markets, have further enhanced the economics for plan sponsors and lowered risk assumed by insurers and, therefore, by the retirees they protect.

As plan sponsor motivations for pursuing pension risk transfer are shifting from administrative cost savings to risk management objectives, the PRT industry is evolving and innovating to address more complex liabilities, such as large deferred life blocks and assets, such as illiquids, that are more challenging to settle. This evolution has different implications for sponsors, depending on their varying objectives for different populations.

Strategic Considerations: Different Objectives for Different Populations

Source: Athene

Concurrent with the shift to larger and more complex transactions, many sponsors also need to develop a game plan for their less-liquid assets. For those planning for a large transaction and/or a full-plan termination, the asset strategy and transfer-in-kind options become more complex.

Asset in Kind Portfolios – Broadening in Scope with Full Plan Terminations

Source: Athene

Insurance companies that are well versed in complex estimations and assumptions around asset risk, longevity risk and behavioral patterns are reliable partners for sponsors as their pension derisking journey evolves. PRT transactions allow corporations to remove the risks associated with their legacy pension obligations and focus on their core business and operations. Meeting all their fiduciary obligations can ensure that participant security is not compromised in any way.

V

EVALUATING AN INSURANCE PARTNER

DOL guidance and protections   
Insurance regulations impose robust capital requirements on insurers. For PRT, in particular, regulators impose additional requirements and guidance for pension fiduciaries in choosing a qualified insurer. Pursuant to IB 95-1,¹ fiduciaries are required to consider “a number of factors relating to a potential annuity provider’s claims-paying ability and creditworthiness,” which are laid out in the guidance, with the ultimate goal of selecting the “safest annuity available.” In addition, IB 95-1 specifically states that there can be more than one safest available provider. In its recent report, DOL stated that the interpretative bulletin “continues to identify broad factors that are relevant to a fiduciary’s prudent and loyal evaluation of an annuity provider’s claims-paying ability and creditworthiness.”²

Participant security is the number one priority when selecting an insurer. Qualified advisers play a valuable role helping plan sponsors separate fact from fiction when it comes to participant safety.

Kelly Kearns

Vice President, Pension Group Annuity, Athene

Recent developments   
“DOL’s recent report did not call for any changes to IB 95-1, pending further review, and supported the existing principles-based nature of the framework,” said McEvoy. “This represents high-level validation of the strength of existing regulatory oversight that has resulted in a perfect track record of participant protection, with record of zero benefit reductions for PRT retirees and beneficiaries since the guidance was originally issued.”

Fiduciary and advisory support   
Independent fiduciaries have been retained for the majority of sizable U.S. PRT transactions. They have substantial expertise and analytical tools to evaluate the relative security of PRT transactions and specific insurers. They undertake broad, fact-based analyses of insurers specific to PRT security that go above and beyond the oversight undertaken by rating agencies and other stakeholders. They thoroughly evaluate the specific combination of protections associated with each provider — including measures of balance-sheet strength, business profile, operational readiness and other protections relating to annuity structure — and state guarantees to identify the “safest available annuity” that protects participants from loss.

Consultants must also have the experience to take a client through the full transaction process — from the decision to pursue a PRT transaction to the signing of the contract to the ultimate transfer of beneficiary obligations.

PROFILE OF AN INSURER: ATHENE

DOL 95-1 review considerations   
Since Athene entered the PRT market in 2017, it has completed 46 PRT transactions totaling more than $50 billion in premiums. ³ Athene combines its depth of expertise in retirement services with Apollo’s asset management and capital sourcing expertise across the credit markets. This combination of investment opportunity and capital will help the organization meet the next wave of PRT activity.

Athene excels at the DOL 95-1 determinants of participant safety and is exceptionally strong under the two most significant criteria — level of capital support and structural protection offered by separate accounts. In addition, the insurer’s administrative support model is a crucial element of due diligence for these transactions.

Athene Excels Under Department of Labor Pension Risk Transfer Criteria ¹

Notes  
¹ Department of Labor 95-1 Criteria.  
² 97% of available for sale fixed maturity securities rated NAIC 1/2, as of Dec. 31, 2023.   
³ Net reserve liabilities as of Dec. 31, 2023.  
⁴Financial strength ratings for Athene Annuity & Life Assurance Company, Athene Annuity and Life Company, Athene Annuity & Life Assurance Company of New York, Athene Life Re Ltd. and Athene Annuity Re. S&P, Fitch, AM Best’s and Moody’s credit ratings reflect their assessment of the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. S&P rating as of January 2024 (A+, 5th highest out of 21), Fitch rating as of September 2023 (A+, 5th highest of 19), AM Best rating as of June 2024 (A+, 2nd highest of 16) and Moody’s rating as of July 2023 (A1, 5th highest of 21). Athene Holding Ltd.’s credit rating is A-/A-/a- for S&P, Fitch and AM Best, respectively.   
Source: Athene

While credit ratings are not explicitly listed as one of the IB 95-1 criteria, Athene has seen a progressive succession of upgrades from the various agencies as validating Athene’s financial strength and business model. Notably, AM Best, the world’s largest credit rating agency, recently upgraded Athene to an A+ insurance financial strength rating in June 2024. Today, Athene’s financial strength ratings of its primary insurance subsidiaries are ‘A+’ from S&P, ‘A1’ from Moody’s, ‘A+’ from Fitch and now ‘A+’ from AM Best.⁴

Level of capital and surplus   
Athene holds over $26 billion of regulatory capital,⁵ and is one of the largest U.S. life insurance companies. It is also less levered, with an adjusted debt-to-capital ratio of 16.5% as of March 31, 2024, compared with the approximate 22% industry average.⁶

As illustrated by Athene, their stress test has demonstrated that their strong capital position protects participants even in scenarios like the 2008 financial crisis.

Structure and supporting guarantees   
Separate Account Protections   
Athene places all its PRT assets into separate accounts, substantially increasing the level of security provided to PRT participants. Unlike most insurers, Athene also ensures all separate accounts are fully funded at inception and maintain full funding over the contract life.

Reinsurance Protections   
Unlike most of its peers, Athene has an ability and practice of fully funding its separate accounts at the outset and on an ongoing basis. Athene’s reinsurance structure further enhances the protections to its separate account in that Athene would be obligated under its treaty to fully fund any deficit arising in its separate account commensurate with the portion of the obligation reinsured.

In addition, Athene operates its Bermuda subsidiaries to the same capital and risk standards as its U.S. subsidiaries. Athene manages Bermuda balance sheets to the most binding capital regimes implied by each of Bermuda regulators, U.S. regulators and Athene’s four rating agencies. Athene’s goal for the Bermuda structure is to be able to attract outside investor capital.

Quality of investment portfolio   
As Athene has grown rapidly to be a leader in PRT transactions in the U.S., it has maintained a highly capitalized and conservatively invested approach. Keeping a strong focus on participant security as its top priority, it maintains 97% of its portfolio in investment-grade fixed income⁷ with lower credit impairment experience than its peers.⁸

Historical Credit Loss Experience Outperforms Other Top 10 PGA Writers

Notes:  
¹ Athene’s statutory fixed-income impairments adjusted to include changes in mortgage loan-specific reserves in relation to average invested assets of regulated entities in the U.S. and Bermuda.   
² Industry average represents U.S. statutory impairments adjusted to include changes in mortgage loan specific reserves, per SNL Financial. Industry average includes AEL, AIG, AMP, BHF, EQH, FG, LNC, MET, PFG, PRU, VOYA and Transamerica.   
³ Athene’s impairments were adjusted to exclude an internal securitization where all the underlying commercial mortgage loans are performing.   
Source: Athene

Our partnership with Apollo provides significant expertise and asset management capability to deliver better economics to our clients within a robust risk management framework.

Sean Brennan

Executive Vice President of Pension Group Annuity and Flow Reinsurance, Athene

CASE STUDY OF AN ATHENE PRT TRANSACTION   
When U.S. retail outlet chain JCPenney filed for bankruptcy, the retirement savings for tens of thousands of retirees were at risk. While the company’s assets were being sold off, the pension plan was hanging in the balance. It was slated to be taken over by the Pension Benefit Guaranty Corporation, which would cut the benefits promised to workers.

Athene stepped in and kept these retirees whole by structuring a PRT for JCPenney that preserved all pension benefits, saving 39,000 pensioners from having their retirement benefits cut while guaranteeing future payments.

“JCPenney was confident that we would have the solutions orientation to be able to provide them with a good outcome, not only on the liability side but also because they had a fair amount of illiquid assets that needed to be valued to ensure a viable transaction,” Brennan said. The close call JCPenney pensioners faced is just one example of how the pension crisis can impact American companies and retirees.

PRT Transaction with Athene Protected JCPenney Pensioners’ Benefits During Bankruptcy

Source: Athene

Athene offers a unique value proposition for plan sponsors considering a PRT transaction, bringing deep experience, favorable pricing, customized solutions, prioritization of beneficiary protection and a commitment to providing outstanding service to participants.

VI

PREPARING FOR IMPLEMENTATION

There are a number of important considerations in preparing for a PRT implementation, including governance roles, investment strategies for assets backing the remaining plan, resource planning, participant data quality and privacy, legal agreements and participant communication.

Timeline for a PRT Implementation

Source: Athene

The plan sponsor’s strategy should fit within a broader holistic journey that involves its investment management, PRT strategy and funding strategy.

Richard McEvoy

Senior Vice President and Pension Group Annuity Leader, Athene

Governance   
The process to undertake a PRT should begin with all related fiduciary roles and responsibilities being clearly assigned across all appropriate stakeholders. In many situations, one corporate executive can wear two hats: as plan sponsor and as fiduciary. In the case of a PRT, however, the two roles must be clearly specified: The plan sponsor should be responsible for the strategy setting and determining how best to prepare and execute the PRT transaction, while the fiduciary should be responsible for evaluating the financial security of insurance companies being considered. Typically, an independent fiduciary or independent expert is retained to assist with fulfilling fiduciary responsibilities.

Investment strategy for assets backing the remaining plan   
As plan sponsors enter the PRT process, they need to carefully consider the impact on their overall remaining investment portfolio and its interest rate hedging approach. Given that plan liabilities change in response to shifts in interest rates, most sponsors have developed hedging strategies that need to be adapted from the pre-transaction to the post-transaction phase.

Many PRT transactions are also executed through asset-in-kind transfers, where a plan sponsor finances a part of a group annuity purchase through a conveyance of securities, typically fixed income, to the insurer. Since insurers tend to buy similar assets to immunize their obligations under the agreement, asset-in-kind transactions are cost-efficient because they reduce transaction fees and enable smoother risk-hedging through the process.

Preparation sometimes needs to start early in the planning process for asset-in-kind transactions, particularly for plans that have private market assets. This is often coordinated with the pension plan’s liquidity needs. For instance, some sponsors may be in wind-down mode, with a lump-sum distribution planned. When engaged in a PRT, sponsors need to be careful that they don’t transfer all liquid assets while retaining illiquid assets, which could create a potential liquidity problem.

Resource planning   
Resource planning by the plan sponsor is a key element for the successful completion of a group annuity purchase. The plan sponsor’s administration team and the independent fiduciary negotiate key contract elements, including business and legal terms, with each of the insurers involved in the bidding process. After an insurer is selected, the efforts shift from a negotiation of business terms to a collaborative process among the plan sponsor, its current administrative provider and the insurer to draft a comprehensive description of the applicable payment forms and benefits for all participant beneficiaries under the transaction.

From the insurance company’s standpoint, it is important to conduct weekly calls during which the plan administration team can respond to process questions and ensure accurate collection and verification of participant data. Commonly, weekly calls are held until the first direct payment is made, at which point calls are scheduled as determined by the appropriate parties.

“The focus is on data validations, and corrections identified through the data-scrubbing process, to examine data elements that can impact the group annuity contract premium pricing,” said Tracey Weber, Vice President of PRT Implementation, Athene.

Participant data   
Participant data accuracy has considerable influence over the PRT process and its pricing, and there is a spectrum of data quality among plan sponsors who undertake such transactions. Some start working on data cleanup and consistency earlier than others, particularly if they are guided by experienced consultants.

We put in the extra time, detail and care needed in drafting the benefit provisions with specificity, the goal being to ensure that participants have total confidence that their benefits have been fully preserved.

Karen Braga

Vice President, Legal, Athene

“A PRT transaction is as much a data journey as a financial one, and strong data quality is important for the sponsor to avoid mispricing,” Weber said.

Data privacy   
Prior to the selection of an insurer, the plan sponsor’s census file does not contain any personally identifiable information (PII). It includes data needed from a pricing perspective, such as gender, date of birth, payment form and payment amounts. Each record is assigned a generic ID for ease of reconciliation going forward. Post-insurer selection, each record is updated with the PII to cross-reference and ensure accuracy. At all stages, secure transfer of data is paramount.

The Commitment Agreement is executed on the insurer selection date by the plan sponsor, the insurance company and, in many cases, the plan fiduciary. It binds the parties to enter into a group annuity contract once it has been approved by any applicable state regulatory agency, and the obligation is subject to the transfer of the premium to the insurance company on the closing date.

Prior to the insurer selection date, the plan sponsor and, if applicable, the plan fiduciary, fully negotiate all legal and business terms of a commitment agreement with each insurer that is involved in the bidding process. By the date of insurer selection, no further negotiation is needed; and at the closing date — typically one week later — the plan sponsor transfers the premium to the selected insurance company.

The GAC is signed by the plan sponsor, as contract holder, and the insurance company, which issues the contract. The contract provides that even if the plan sponsor ceases to exist, the insurer maintains its full obligation.

Prior to the insurer selection date, the plan sponsor and, if applicable, the plan fiduciary, negotiate all critical legal and business terms of a group annuity contract with each insurer that is involved in the bidding process. After an insurer is selected, the plan sponsor, its administration team and the selected insurance company collaborate to draft a detailed description of applicable payment forms and benefits for all covered participants.

“It is critical to ensure that the GAC preserves the exact same benefits provided to participants under the pension plan. A contract lasts for decades, so it’s crucial that the details of the benefits are clear, complete and unambiguous,” said Karen Braga, Vice President, Legal, Athene.

Completing the GAC can take anywhere from six to eight weeks to several months, depending on the deal’s complexity. Lags in timing could arise from working out details for deferred participants or handling coverage across multiple sub-plans under the pension plan.

GACs are contracts that insurers may be required to file with states for review by the states’ insurance departments. Insurers must be up to date with all filing requirements, which can vary by state in specific elements or by the timing of the process, which must be clearly articulated to all stakeholders in each transaction.

The annuity certificate includes a summary of all the pertinent terms of the GAC as well as a detailed description of the individual certificate holder’s rights and benefits under the contract. The details of the individual benefits are specified in the signed GAC, within the annuity exhibits, and lifted directly into the annuity certificate. Certificates are mailed after the GAC is executed and all applicable state regulatory approvals have been obtained.

“Athene considers two sets of clients when we approach PRT transactions: the plan sponsor and the participants,” said Braga. Following the firm’s extensive experience executing group annuity contracts, Athene aims to provide plan sponsors with an efficient and streamlined process and to conduct an intensive review of participant benefits to finalize precise language in the GAC that minimizes any confusion on the part of the participant.

To ensure a seamless experience for participants, Athene conducts a detailed review of participant benefits prior to the transition, ensures rigorous training to its call center representatives and provides easy access to online and call center help to participants.

Tracey Weber

Vice President, PRT Implementation, Athene

Deferred participants   
For group annuity contracts that include deferred participants — active employees or early retirees who have not yet commenced benefits — additional time and resources are spent by both parties to understand how these benefits are administered and the specific plan provision or nuances that are relevant to this population. With more plan sponsors considering full-plan terminations that include deferred participants, appropriate resource planning is a key consideration to achieve a smooth transition.

After the welcome kit is mailed, both the call center and the insurer’s website become live, with the insurance company taking over future benefits administration. Any calls at the time of transition made to the plan sponsor’s current administration team, or any pending tasks around address changes or death claims, are sorted and handled by the insurer in consultation with the plan sponsor.

The insurer needs to be responsive on transactions in process or questions around information both in the welcome kit and in the annuity certificate.

Having a collaborative process for the transition that includes the current administration team, the outside legal team and other advisers is helpful in bringing a wealth of knowledge into the transition discussions, said Braga. That is crucial in the case of full-plan terminations that include deferred participant benefits. “You’re taking over benefits that will continue for 20, 30, 40 or more years into the future, so you want to ensure that there’s no ambiguity in the contract language and that there’s no question from a participant’s perspective that they will continue to receive the exact same benefit coverage they’ve earned under the pension plan,” she said.

VII

ADDITIONAL RESOURCES