Pension risk transfer premiums hit record low – paper

Pension risk transfer premiums are lower than ever, according to a paper from pension risk consultant BCG Penbridge.

The consultant was involved in 53 PRT transactions in 2020, involving the purchase of group annuity contracts by U.S. corporate pension plans to transfer a certain number of retirees and pension liabilities to one or more insurers.

Among those transactions, 42 were full plan terminations, and the average premium was 101%.

Among the 11 PRT transactions that involved retiree liftouts, the average premium was only 94%.

Premiums are calculated by the ratio of the annuity bid price divided by the value of the projected benefit obligations. Premiums have traditionally been well above 100%.

The paper cited three factors contributing to record low premiums. First, the paper said, 10 of the 18 insurers in the PRT market have all entered the market since 2014, resulting in more competition to win deals.

Second, the paper said, PRT insurers are working toward better assessments of mortality risk and better pricing as a result, and third, insurers are using more structured assets, such as collateralized loan obligations, as alternatives to corporate bonds, all of which lead to better competitiveness in PRT pricing.