Risk Transfer Potholes: How to Avoid Them or Brace for Impact

10 years have passed since the watershed year for pension risk transfer. In 2012, Ford, GM and Verizon all made landmark risk transfer transactions including lump sum cash outs and annuity purchases. Before that time, annuity purchases were rarely used, as shown in the exhibit1 below. Annuity purchases have since picked up significantly, with a record year in 2021 and 2022 set to be another record year, particularly with IBM’s recent announcement of a $16 billion transaction (not included in the exhibit below).

U.S. pension annuity purchase transaction volume

Lump sum offers were also relatively uncommon ten years ago. Due to a combination of changing lump sum conversion rules enacted with PPA, and the fact that the year 2012 was a falling rate environment (in addition to many other individual years since then), lump sum offers suddenly became mainstream.

After 10 years most U.S. corporate DB sponsors have pursued at least one form of risk transfer. The vast majority have seen proposals for additional risk transfer transactions put forward by their plan actuary or other advisors. Sponsors are often troubled with deciding when and if risk transfer makes sense. The decision is not inconsequential, nor is it always straightforward.

The trend toward annuity purchases is only accelerating (also shown in the exhibit above), and with improved funded status in 2021 more and more sponsors are considering ways to reduce the overall risk of the plan to the organization, and to reduce the plan’s footprint.