Questions arise on whether more is better in PRT market

The U.S. pension risk transfer landscape has experienced significant growth over the past decade, but some are questioning whether the bevy of insurers entering the market all provide the safest available annuity option for pension plan participants.

The questions have arisen following the entry of insurance companies into the PRT market that have been backed by alternative money managers, which allows the insurers to more easily access private assets that carry the promise of higher returns.

Over the past 10 years, the pension risk transfer market has seen a significant influx of insurance companies selling group annuity contracts to U.S. corporations eager to transfer the risk of their pension plan liabilities.

As recently as 2014, there were only eight insurers selling annuity contracts, including long-established insurance industry stalwarts such as Prudential, Massachusetts Mutual Life Insurance Co. and MetLife Inc. There are now 19 insurance companies in the market. By year-end, industry experts say an additional insurer will be joining the market, with at least two more expected to join in early 2023.

Among the most visible of the newer insurers is Athene Holding Ltd., which was established by Apollo Global Management Inc. in 2009. Previously a minority shareholder in the company, Apollo completed an $11 billion deal to fully acquire the insurer in January.

It was the latest in a flurry of mergers, acquisitions and strategic relationships completed between alternative managers and insurers that dominated headlines in 2021.

However, controversy was not far behind, and concerns regarding alternative manager-backed insurers reached its peak in February, shortly after the closing of the Apollo-Athene deal, when Sen. Chris Murphy (D.-Conn.) introduced the Pension Risk Transfer Accountability Act of 2021.

It was ultimately included in the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act, or RISE and SHINE Act, which was approved by the U.S. Senate Health, Education, Labor, and Pensions Committee in June. The bill could ultimately be part of a SECURE 2.0 retirement legislative package.

"The Department of Labor hasn't updated their PRT guidance in almost 30 years, and that creates serious risk for workers who count on the security of their pension savings," Mr. Murphy said in an emailed statement. "Private equity firms looking to turn a quick profit shouldn't be allowed to buy out pension liabilities, transfer them to riskier investments, and strip beneficiaries of their ERISA and PBGC protections."

The guidance from the DOL includes Interpretive Bulletin 95-1, which relates to the fiduciary standards under the Employee Retirement Income Security Act of 1974. The bulletin was published in 1995 and was designed as a result of the collapse of Executive Life Insurance Co. in 1991.

"The composition of the investment portfolios that Executive Life was doing was to provide high-quality triple A annuities, but largely on junk bonds," said William Ryan, New York-based president, CEO and chief fiduciary officer at Newport Trust Co., in a phone interview. "That was really the impetus for the Department of Labor's action because they really hadn't focused on this before that."

DOL 95-1 requires corporate plan sponsors and their fiduciaries to consider the quality and diversity of an insurer's investment portfolio, its size, its lines of business and exposure to liability, the contract structure and guarantees, its capital and surplus levels, its paying ability and its creditworthiness. Those considerations all add up to corporate plan sponsors being required to select the "safest available annuity" from an insurance company.

Newport Trust Co. serves as an independent fiduciary to corporate plan sponsors on pension buyout transaction sizes of between $100 million and nearly $1 billion, Mr. Ryan said. He was the chief benefits counsel for Prudential when the bulletin was published.

"The original issue quite frankly was around conflicts and pricing," Mr. Ryan said. Specifically, he said those who were purchasing annuities were sacrificing safety for the cheapest available annuities from Executive Life.

Corporations interested in purchasing an annuity contract to transfer liabilities will often use an independent fiduciary to analyze the safety of the insurers in the market.

"So that in fact, if a safe company was offering a cheaper product, there was at least someone to look over their shoulder that wasn't trying to sell the plan down the river," Mr. Ryan said.

In October, money manager NISA Investment Advisors LLC, Clayton, Mo., published a bulletin asking whether all the insurers indeed provided the "safest available annuity." David Eichhorn, NISA's CEO, posed the question of whether the insurers in the marketplace had an equal measure of creditworthiness by examining the traded spreads of the bonds of the insurers and determining the market's assessment of their relative credit risk.

NISA analyzed nine insurers in the pension risk transfer marketplace by comparing their agency ratings with the market-implied rating and found a 140-basis-point difference between the top-ranked insurer, New York Life Insurance Co., and Athene at the bottom.

"If you're choosing a lower quality as measured by the markets, you are forcing those beneficiaries (to take) the higher risk but they're not getting the benefit of the higher return," Mr. Eichhorn said in a phone interview.

Over the past decade, industry experts have pointed to the growth in the number of insurance companies as being good for competition as the premiums charged by insurers have fallen over the years.

Mr. Eichhorn, however, argues that the insurers are not remotely similar in their credit quality based on their spreads, thus transferring the risk to plan participants.

"NISA's analysis draws false conclusions from credit spreads in the relatively niche, illiquid market for funding agreement-backed notes (FABNs) that have zero bearing on the actual level of safety and protection that Athene provides to its policyholders, which is recognized by A+ ratings by S&P and Fitch, and A1 by Moody's," said Martin Klein, Athene's executive vice president and chief financial officer, in an emailed statement. "Further, NISA's analysis fails to acknowledge the single most basic and important factor in evaluating participant security, the actual level of available capital held by the company. Athene consistently holds capital in excess of S&P AA standards."

Corporate plan sponsors must avoid the complacency of believing these transactions are commonplace, said Stephen Keating, Stamford, Conn.-based managing director at BCG Penbridge, part of BCG Pension Risk Consultants Inc.

The firm provides independent fiduciary services for transactions averaging $20 million each, Mr. Keating said.

"The level of scrutiny and expertise is increasing, so plan sponsors from my perspective need to view this as a very high-value exercise ultimately to protect the participants in the plan," Mr. Keating said.

He added plan sponsors need to reset the rigor of their processes because even if they are going to hire a sole independent fiduciary, there is still a selection process by an in-house fiduciary and they still have the responsibility of monitoring the independent fiduciary.

Fiduciaries often employ the services of an independent expert to look at the creditworthiness of each potential insurer.

One firm providing expertise is Agilis Partners LLC, the former U.S. business of River and Mercantile. James Walton, Waltham, Mass.-based managing director, said in an interview their analysis of insurance companies will result in a "pass/fail" judgment they will pass on to the fiduciaries.

"Typically the independent expert opines as to whether the insurer is the safest annuity available, and once they pass the test the fiduciary will then select the insurer," Mr. Walton said.

Often, corporations will select the passed insurer that offers the best price, "but that isn't always the case," Mr. Walton said.

"Particularly, some committees place more value on the administration and the participant experience," he said. Also, "it's a minority of cases, but we do see some committees taking it upon themselves not to select one or two insurers, rightly or wrongly, as more risky."

Mr. Walton said one of the reasons that the PRT market has been able to take on more insurers is because of separate accounts used to house the liabilities of plan participants, rather than placing those liabilities in the insurers' general accounts.

"The use of separate accounts, which substantially increases the security of the benefits, is one of the innovations in the past five and 10 years," Mr. Walton said. "The use of separate accounts, I think, has been an important factor in terms of getting comfortable with some of the new entrants."

The separate account provides a separate book of record for the assets and liabilities, so that if an insurance company fails, the assets of the separate account can only be used against those relevant liabilities, adding an extra level of security for those assets.

"One of the big takeaways from our perspective: there is rarely a single criteria that would fail an insurer," said Michael Clark, Denver-based managing director at Agilis, also in the interview. "You really have to take things as a whole. There's the six criteria that DOL 95-1 spells out, and there are others."

Mr. Walton did not provide specific information on insurance companies that failed Agilis' analysis, but mentioned that the firm has failed some insurers that attempted to bid on transaction volumes above their capacity.