The Next Wave for DB Plans: What’s behind the rapid growth of the PRT market?

With pension risk transfers seeing record growth, plan sponsors are pursuing integrated solutions and experiences, while insurers are seeking cost-effective administration to manage rising volumes.

As economic instability continues to loom, both businesses and those nearing retirement are facing an uncertain reality. For companies with pension plans, reducing liabilities, risks and administrative costs are critical to future successes. On the flip side, employees are looking for more predictable income and the assurance their money will last.

Amidst this instability is a passing of the torch in the workplace as we hit Peak 65, an era in which more Americans will reach the retirement age of 65 in the same year than at any time in history. A recent report from Allianz reveals more than one-fifth (22%) of Americans employed last year plan to retire in 2024. And by 2030, all boomers — those born from 1946 through 1964 — will be 65 or older. This means one in every five Americans will have reached the traditional retirement age.

While most businesses have opted for 401(k) plans, about 15% of private U.S employees still have access to a defined benefits (DB) plan, which is highly influenced by market conditions. As plan sponsors look to reduce the risks associated with these plans, they are benefitting from the growth of the pension risk transfer (PRT) market, where insurers are taking on the pension plans and annuitizing them to create a win-win for both plan sponsors and employees. Given there are more than $3.1 trillion of assets that could be moved off of corporate books, there is no better time to explore PRTs.

The recent increase in interest rates, combined with Peak 65, creates a perfect storm for PRTs to thrive. As higher interest rates have greatly improved the funding levels of DB plans — providing more retirement funds to secure retiree benefits— they have also brought greater risks to plan sponsors. Alternatively, insurers are viewing these growing asset pools as an opportunity to execute. That is, to match assets and liabilities and effectively manage their life cycle to provide long-term stability for the income needs of the annuitants.

“Today’s interest rates have been great for pension plans – on average, they are over 100% funded, on a GAAP basis, and roughly a quarter are over 110% funded,” said Richard McEvoy, SVP and PRT Leader at Athene, a leading retirement services company. “Sponsors of legacy frozen plans in particular can now transfer their plans entirely and shift all pension obligations through a full plan termination, without any further cash outlay needed.”

This practice can be advantageous for plan sponsors, insurers, and beneficiaries.

“For beneficiaries, this process can create more assurance,” McEvoy said.” By having insurers take on responsibility for pension payments, in a tightly secured and well capitalized structure, beneficiaries can feel more confident in their retirement security.”

McEvoy’s comments come as the PRT market continues to experience unprecedented growth. According to LIMRA1, in 2022, total PRT market sales accelerated to $52 billion, surpassing the 2021 record when the market reached $38 billion in sales. Additionally, LIMRA recently reported a record-high number of PRT contracts sold in the third quarter of 2023, while a MetLife survey showed 90% of companies with DB liabilities are considering transferring obligations to a life insurance provider for an annuity buyout.

The growing PRT market is complex. The volume of transactions and the distinctive features among plans often make managing them a challenge.
“The biggest hurdle is establishing the infrastructure needed to manage PRTs,” said John Larson, Vice President at Conduent Human Capital Solutions. “The work, complexity and risk that comes from developing a system can be a deterrent, as such processes can take months to build and require significant up-front capital.”

Larson further comments that once the foundation is created, insurers also need to consider the ongoing administration and maintenance to keep systems functioning and beneficiaries happy, especially as they continue to bring on new plans.

These complexities are pushing insurers toward an outsourcing model — one allowing them to partner with a recordkeeper and administrator. Such practices provide twofold benefits. First, they allow the insurer to leverage the technology, expertise, and ability to scale offered by the partner, ensuring plans can be maintained for the long term. This includes cleaning data, accelerating implementations, supporting strategic communications, providing real-time access to plan advocates and administering the PRT.
By covering this list of administrative dependencies, partners can indirectly provide a second benefit to insurers: the freedom to focus on their strengths of risk management and asset accumulation.

“Partners provide services that insurers typically don’t offer, as their expertise is more on securing the best retirement products, not the back-end administration,” said Matthew Cronin, Total Benefits Product Leader at Conduent. “Relying on a partner approach allows insurers to provide a differentiated service without distracting from core business initiatives.”

Both Athene and Conduent have experienced the benefits of a partner relationship firsthand, having worked together as the insurer and administrative partner for the last 6+ years. Over the partnership they have been able to reduce implementation times by 50%, even with transitions involving more than 25,000 participants that they have deployed fully in less than 3 months.

“Ease of implementation and administration – as well as the ongoing member experience – are always top of mind when talking to a plan sponsor, as the end customer is always our first priority,” said McEvoy. “Working with Conduent, we understand the partnership benefits of having an experienced market leading administrator onboard and manage beneficiaries, which in turn allows us to focus on growing and scaling the PRT portfolio.”

The success of a PRT is ultimately determined by the alignment between the insurer and the administrative partner. “Insurers are relying upon partners to serve as an extension of their team, providing the expertise and scalability to handle beneficiary concerns as they arise,” noted Larson. “As a result, the insurer/partner relationship is one where insurers must have complete faith in their partner and thus should conduct extensive due diligence before transacting.”

For insurers, it’s critical to understand how the partner supports beneficiaries, the relationships it has with PRTs and its future market plans. Specifically, insurers should inquire about a potential partner’s expertise in DB, previous experience with PRTs and situations where it has quickly implemented complex programs.

As stated by Larson, “Whether adding 5,000 or 100,000 annuitants, a qualified partner must be able to quickly scale to fulfill the support needs. This goes beyond adding employees, but also includes the ability to scale expertise through necessary on-the-job training.”

As we enter Peak 65, uncertainty abounds for both plan sponsors and participants, but the growth of PRTs is showing how plan sponsors, insurers and beneficiaries can prepare for a more certain future. By transferring assets to insurers, plan sponsors are mitigating corporate risks while protecting their beneficiaries. For insurers taking on plans and relying on administrative partners, they are growing their portfolios without having to worry about back-end management – all while beneficiaries are being welcomed into a world of more predictable income and the ability to retire with confidence.

With 2024 PRTs expected to continue year-over-year record growth, now is the time to find an outsourcing partner to provide stability to insurer operations and comfort to beneficiaries.

_{¹ LIMRA, U.S. Group Annuity Risk Transfer Study, YTD Q4 2022.}