Over the past 12 months through June, $57.4 billion in liabilities were involved in pension risk transfer deals.
Pension buyout transactions reached $25.3 billion, or 44.1% of the total, followed by buy-ins of $23.2 billion, 40.4%, and longevity swaps of $7.5 billion, or 13.1% of the total. Buyout transactions increased 93.3% from $2.9 billion in the first quarter but buy-in transactions declined to $2.4 billion from $7.3 billion.
By comparison, pension risk transfer transactions hit a record high of $76.2 billion for the year ended June 30, 2020, with 19.6% of that total coming from buyouts, 45% from buy-ins, and 29.8% from longevity swaps.
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Buyouts totaled $25.3 billion for the year through June 2022, a 73.1% jump from the same period a year ago. Buy-ins increased 47% from $15.8 billion a year ago but are down 48% from the record of $34.3 billion for the 12-month period ended June 30, 2020. Longevity swaps declined to $7.5 billion, below their peak of $26.3 billion.
The improved funding ratios over the past few years have made pension risk transfer transactions more affordable and allowed plan sponsors to derisk or fully terminate plans.
Based on Milliman’s Pension Funding index, corporate plans achieved a cumulative annual investment return of 8.3% and a liability decrease of 1.9% in 2021.
P&I’s 100 largest U.S. corporate DB plan data shows that the aggregate funding ratio increased to 96.9% in 2021 from 88.4% at the end of 2020. Total plan assets increased 3.4% to $1.46 trillion in 2021, while total liabilities decreased 5.6% to $1.51 trillion over the same period.
In addition to disclosing pension shortfalls on the corporate balance sheets, the Pension Protection Act of 2006 has put more pressure on plan sponsors to maintain healthy funded status. The American Rescue Plan Act of 2021 offered funding relief, allowing plan sponsors to raise interest rates used for future years and amortize the funding shortfalls over 15 years instead of seven years.
With a longer horizon to cover pension obligations, plan sponsors might need to reconsider the trade-offs between the premium paid to insurers for offloading pension liabilities and managing obligations in-house to earn potential asset returns.
Through the passage of the Moving Ahead for Progress in the 21st Century Act in 2012, PBGC premiums have been rising over the years, a factor that impacts plan sponsors’ derisking strategies.
The flat-rate premium and variable-rate premium increased to $88 and $48 in 2022 from $74 and $38 in 2018, respectively. In particular, underfunded plans have more incentives to engage in pension risk transfers to reduce the number of their participants and, as a result, reduce variable-rate premiums.
Because of declining average insurer pricing and competitive bidding, plan sponsors are paying lower premiums, resulting in more pension risk transfer transactions over the years.
The Milliman Pension Buyout index tracks the average cost of pension risk transfer transactions. Both the average and most competitive insurers’ rates have dropped over the years, but the gap between average and competitive rates has widened. Plan sponsors saved an average of 3.9% as of May 2022 compared with 2.3% as of May 2021.
After the initial report was written, IBM completed the largest U.S. buyout transaction in a decade in September. IBM transferred $16 billion in liabilities covering 100,000 participants to Prudential Insurance Co. of America and Metropolitan Life Insurance Co.
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