The U.S. pension risk transfer market remains robust in 2023, although it may not break the record for dollar volume set in 2022, experts say.
This is despite a new record for dollar volume in the first half of 2023, totaling $22.5 billion in premiums paid for pension buyout transactions, according to research firm LIMRA.
In 2022, the total volume was $48.3 billion, driven primarily by corporate pension funds' improving funding ratios, which have enabled many to pull the trigger on purchases of group annuity contracts from insurance companies to transfer some or all of their pension plan liabilities. Many corporations have expressed interest in pension buyout transactions, and rising interest rates have lowered liabilities, so even during a time of volatile investment returns leading to asset losses, ratios have improved.
While the record-setting year of 2022 was notable, a full third of that volume came from a single transaction. In September of that year, International Business Machines Corp., Armonk, N.Y., purchased group annuity contracts from Prudential Insurance Co. of America and Metropolitan Life Insurance Co. to transfer a total of $16 billion in U.S. defined benefit plan liabilities.
It was the second-largest such transaction in U.S. PRT history, behind only Detroit-based General Motors Co.'s 2012 purchase of a contract from Prudential to transfer $29 billion in pension plan liabilities.
"Last year, we had the $16 billion deal. You know that tipped the scale a bit in terms of making that a record year," said Matt McDaniel, U.S. pension strategy and solutions leader at Mercer.
"I suspect the dollar premium volume will be down a little year-over-year, but we'll probably be somewhere in the 40s (billion) is our best guess," McDaniel said.
During the first half of 2023, the largest deal (and third largest all time) took place in May when Dallas-based AT&T Inc. purchased group annuity contracts from two Athene Holding subsidiaries to transfer $8.1 billion in U.S. pension plan liabilities.
In August, Athene Annuity & Life Co. and Athene Annuity & Life Assurance Co. of New York took on the responsibility for paying benefits to about 96,000 AT&T participants and beneficiaries.
It represented just less than 20% of the company's total U.S. pension plan liabilities.
As a result, the transaction contributed to a record volume for the first half of any calendar year, well above the $15 billion in volume completed in the first half of 2022.
It may represent the market maturing because historically the majority of transactions have been completed in the second halves of calendar years.
Ari Jacobs, senior partner and global retirement solutions leader at Aon, said 2023 will likely be more balanced in terms of transactions being spread out for the year.
"We continue to see many insurers in this market, so the market remains a market that the insurance industry and capital is focused on," said Jacobs. "I see no shift in that trend whatsoever."
He also said the increase in the number of insurers focused on specific kinds of deal volume goals has also contributed to the market maturing, with corporate plan sponsors becoming more familiar with their options.
When General Motors completed its historic transaction in 2012, there were six insurers serving the market, and now there are over 20 insurers involved in PRT transactions.
While the volume level for 2023 may not break a new record, there is likely a record number of transactions coming down the pipeline thanks to the rising interest rate environment that lowered liabilities and improved funding ratios.
As of Dec. 31, the average discount rate among publicly traded U.S. companies with the 100 largest defined benefit plans was 5.25%, a full 237 basis points above the prior year's average of 2.88%.
That dramatic rise in discount rates came primarily as a result of the Federal Reserve's aggressive fight against inflation, which reached its end point for the calendar year on Dec. 14 when it raised the federal funds rate to a range of 4.25% to 4.5%. It was last raised in July to 5.25% to 5.5%.
Michael Moran, senior pension strategist for Goldman Sachs Asset Management, said that pension buyout transactions take time.
"Think about really how 2022 evolved and got many plans back to a fully funded or an overfunded level," said Moran. "For many of them, that kicked off that process they're going through in 2023, and that process might be underway and won't close until the fourth quarter."
The first large transaction of the fourth quarter was announced on Oct. 18 when Dallas-based ATI Inc. announced an agreement to purchase group annuity contracts with two Athene Holdings subsidiaries to transfer about 85%, or about $1.5 billion, of its remaining U.S. pension plan liabilities. It was the eighth in a series of buyout transactions completed since 2016.
During the first half of 2023, 70% of the $22.5 billion in volume came from retiree liftouts, although 50% of the 289 total transactions completed during the period were full plan terminations, according to Aon.
Retiree liftouts have traditionally taken up the majority of dollar volumes because corporate plan sponsors have been motivated to reduce the headcount in the plan to save on administrative costs, and especially on PBGC fixed-rate premiums. Those premiums have risen dramatically in the past decade, and the Pension Benefit Guaranty Corp. just announced that those premiums will exceed $100 per participant for the first time in 2024, going up to $101 per person from $96 per person in 2023.
"We have seen signs that the dollar volume will move more toward plans terminations than liftouts," said Jacobs, "but we think that is a multiyear trend but not occurring soon."
McDaniel echoed those sentiments, since plan terminations are particularly lengthy processes, lasting 18 months or more.
"There will be a higher mix of terminations in the market transacting than in years prior, so I think that's a trend that will likely continue over time, and that's a question of how quickly," said McDaniel. "We do a risk survey also every other year, we found this year, I think, 63% of plan sponsors looking to terminate within 10 years, and we actually think that's higher than reality."
The plan termination process can take anywhere between 12 and 24 months because of IRS and PBGC regulatory requirements.
