US pension plans offloading risk

par Andrew Rickard | November 30 2016 01:30PM

Single premium pension buy-out sales in the United States are at the highest level in years, reaching almost $6 billion in the third quarter of 2016.

Industry research group LIMRA says the industry has not seen these kind of single premium pension buy-out sales since 1990. As of Sept. 30, 2016, 17,165 buy-out contracts were reported and 225 plan sponsors converted their defined benefit (DB) pension plans to group annuity contracts year to date. The latter is an all-time high and 17% more than reported in previous years.

“Pension buy-out activity in the third quarter jumped 80%, compared with prior year and marks the sixth consecutive quarter to exceed $1 billion in sales. This is a first for this market,” said Michael Ericson, an analyst for the LIMRA Secure Retirement Institute. “Traditionally, buy-out sales have experienced the largest growth in the fourth quarter.  However, given the remarkable sales this quarter, third quarter sales may be higher than fourth quarter in 2016.”

Faced with persistently low interest rates and volatile equity markets, DB plan sponsors have been having difficulty keeping their pensions funded. The US Pension Benefit Guarantee Corporation (PBGC) has also increased its premiums significantly and adopted less favourable mortality tables. As a result, LIMRA predicts that companies will continue to transfer pension risk to insurers in the fourth quarter.