ExPEnSE BARRIER
ExPEnSE BARRIER
Pre-PPA
Cost to
Maintain
Full
Funding
buy-out
Cost
Post
1/1/2012
Cost to
Maintain
Full
Funding
buy-out
Cost
PPA Regulatory Minimum
Future Expenses
Lump Sum Cash-outs
So, what are they waiting for?
JUDGING THE RIGHT TIME TO TRANSACT
Most plan sponsors aren’t quite ready to enter into a PRT or buy-out transaction. They probably have
a few years to go before they get to full funding, and they may not want to swallow that whole pill
at once. With rates at historic lows, many sponsors believe it’s a good bet that interest rates will rise
soon. They could get the rest of the way to full funding without more heavy contributions. They would
adopt the “glide path” approach of dynamic de-risking, i.e., use gains in the asset portfolio to take risk
off the table incrementally.
But some plan sponsors are deciding that now is the time to transact. There’s a good argument to be
made that equities will drop at the same time interest rates rise. (Sponsors might even end up worse
off by waiting for interest rates to rise.) As referred to above, companies can be rewarded by financial
stakeholders for offloading their DB plan. There are a number of reasons why it could be important for
the plan sponsor to get that boost now.
One more reason to transact now is for the “early mover” advantage. Due to internal operational
considerations, many insurers will price more aggressively when the PRT market is slow. Conversely,
when the market is full of deals to be done, operational resource constraints might result in limited
