With the recent volatility in U.S. Treasury yields, corporate defined benefit plans heavily weighted to fixed income have new challenges when considering pension risk transfer transactions.
Insurance companies that take on the liabilities transferred from DB plans should weather the storm because of their emphasis on capital efficiency, industry experts said. But falling rates mean they will charge higher premiums for group annuity purchases, which — along with plummeting discount rates and severe equity drops — will affect the ability of corporate DB plans to pull the trigger on pension risk transfer transactions.
As of March 20, the 10-year U.S. Treasury yield had dropped to 0.85% after being as high as 1.65% as recently as Feb. 5, while the high-grade 10-year U.S. corporate yields were 2.4%.
The most desired asset class for asset-in-kind transfers to insurance companies is high-quality long-duration corporate bonds, and most pension funds that manage their liability-driven investing strategies with the goal of matching those assets to the kinds that insurers desire are in decent position, ers desire are in decent position, industry experts say.
However, the Treasury yields do play a significant role for insurance companies because the two main pricing components for pension risk transfer are the liabilities and the investment returns one needs to meet those liabilities, said Mike Siegel, managing director and global head of insurance asset management at Goldman Sachs Asset Management, New York.
"The benefit payouts are not going to change based on the Treasury level, but the investment returns will, and if insurance companies are going to be receiving less investment returns going forward, they're going to charge more to transfer those liabilities," Mr. Siegel said.
"What are the implications though? It depends on plan by plan because some plans are very well-balanced, very well-hedged against low interest rates," he said.