carrier, versus a buy-in, when [they are] still coming from the
employer pension plan.”
Another difference: With the buyout, payments are not
made to the Pension Benefit Guaranty Corporation (PBGC).
With the buy-in option, though, the plan sponsor still needs to
pay the PBGC, Devlin says.
Typically, those companies that choose a buy-in aim to eventually turn it into a buyout, he adds. “The idea is to transfer the risk
and eventually convert it.” This most likely will happen when the
company finally decides to fully terminate the pension plan.
PRT Benefits
According to Mallet, there are several benefits to conducting a
PRT for a plan. “Any kind of risk-transfer type of strategy can
reduce investment risk, early retirement risk,” she says. “This
is going to reduce volatility for the plan. It can have a variety of
positive financial [effects] on cash flow. It depends on what is
important to the plan financially. It turns a source of uncertainty
into certainty for the plan sponsor.
“No one knows for sure,” she adds “what the future will hold
with economic risk, with plan expenses, with fiduciary costs,
with litigation [and] with liability risks that go with the nature of
managing a DB plan. You are reducing those things with a PRT.”
Still, she does not recommend a PRT for all plans. “Every
plan sponsor really needs to think about its program—about the
cost of maintaining the plan and the cost of transferring the risk
of the plan.”
One benefit of a PRT that experts cite is it reduces the uncer-
tainty of a company’s financial situation. “When we have an
uncertain pension cost, we don’t know [the total expenditure],”
says R. Evan Inglis, principal at Vanguard Investment Strategy
Group. “If I reduce the size of the pension plan by buying an
annuity or a buy-in contract, I’m going to get more certainty into
the planning process.”
What Plans Should Consider a Risk Transfer?
Any company with a pension plan may consider a risk transfer
option; however, the plan needs to be at least 80% funded in
order to qualify.
The choice as to whether to conduct a pension risk transfer
is unique to each plan, says Devlin. It will depend on factors such
as: how the company views its pension risk; its evaluation of the
equity, fixed-income and interest-rate markets; the current inter-
est rate, and so on. “It is not just your pension plan,” he says. “It is
how you are functioning as a corporation, what cash is on hand,
what your funding levels are [and] what your retiree block looks
like. It depends on the company’s current situation—there are
many factors to consider.”
Companies looking to de-risk their pension plan typically
are companies that want to focus on their core business, says
Dylan Tyson, senior vice president at Prudential Retirement.
“Generally, those types of plan sponsors are folks that are near
fully-funded status and have an intention of becoming fully
funded.”
When a company decides to conduct a PRT, the buyout
option may be the better choice for the smaller markets—i.e.,
those with plans of $20 million and below, says Devlin. A smaller
company may be less concerned about how the risk transfer will
affect its overall financials than a larger company would.
Beginning the Process
Mallet says good preparation is key when a plan sponsor is considering a PRT. “Often these kinds of transactions are dependent
upon interest rates and markets. You want to be prepared when
the financial conditions are optimal,” she says.
To get started with the process, Tyson suggests the sponsor
contact a provider or talk with his adviser. However, he should
be prepared with a list of questions, Tyson says. Some might be:
What is it that I am looking to get out of my pension plan? What
is my strategy going to be? Do I want to take a significant risk,
with the potential of high returns?
Legal considerations also come into play. David C. Kaleda,
a partner with Alston + Bird LLP, advises the sponsor to determine what the funding strategy will be and whether the plan
is governed under the Employee Retirement Income Security
Act (ERISA). He also recommends Department of Labor
Interpretive Bulletin 95-1, for guidance about what a plan sponsor should look for when evaluating an insurance carrier to use
for a PRT.
Because deciding to conduct a PRT is a fiduciary decision,
the plan sponsor should analyze what he wants to achieve with
the transaction. Mallet recommends that a sponsor have a solid
understanding of the plan’s liabilities and finances. “They need
to have a good handle on plan-participant data,” she says. “These
risk transfer activities are based on participant demographics.”
If you lack the expertise, though, to conduct an analysis, you
should hire someone to do it for you, Kaleda says. “This needs
to be documented very carefully. Doing evaluations, writing it
down, keeping good committee minutes [are all important].”
That way, he says, if issues arise during the PRT process, the
plan sponsor will have documentation to show the analysis was
conducted correctly. —Tara M. Cantore
