You see it discussed in the headlines, on the news and in the political sphere: America is getting older. With life expectancy getting longer and 10,000 Baby Boomers retiring every single day, employers face mounting pension obligations—leading many companies to explore pension risk transfers. But what exactly is this tool? And how can actuaries and benefits administrators help companies manage their pension risks?
Simply put, a pension risk transfer helps an employer transfer the risk and uncertainty of future pension payments to another party. Risk transfers, also called “de-risking,” can be accomplished in a number of ways:
1. The employer offers to pay a lump sum to participants in the pension plan.
2. The employer purchases annuities from an insurance company, offsetting the future liability owed to plan participants.
3. The employer restructures their investments to reduce future risk and help guarantee adequate funds for future payments.
In addition to increasing life expectancy, employers may also be motivated to pursue a risk transfer because of uncertain returns on their investments and the unpredictably of future interest rates. Mitigating the risk helps employers gain more strategic flexibility in their businesses, free up cash flow and create more consistent financial results from year to year.
As the U.S. market has discovered the benefits of de-risking, pension risk transfers have become more prevalent. According to Prudential, U.S. companies have transferred over $67 billion in pension liabilities since 2007, including many Fortune 500 corporations. This trend accelerated beginning in 2012 when General Motors and Verizon purchased annuities to transfer their risk, while Ford Motor Co., PepsiCo, Sears and JC Penney offered lump sum payments to their former employees.
In total, the pension risk transfer has given actuaries and benefits administrators a new tool with which to help their companies thrive.
Are you ready to lend your skills to a different company, or start a new adventure? Contact the actuarial consultants and recruiters at S.C. International for a free consultation. We will get back to you within 48 hours.