PLANSPONSOR - April/May 2019 - 71

of pensions within companies in the
Standard & Poor's (S&P) 1500 index to be
at 90% at the end of February-one of the
best month-end showings since 2013.
" When a plan is 70% or 80% funded,
there is some value to taking risk and
hoping the stock market will rise to reduce
that gap, " Richards says. " Ultimately,
though, sponsors want to take less risk
as they become better funded, and one
way is through larger annuity purchases
to settle portions of liabilities, or even the
whole plan. Improved funded status is the
big factor that will drive risk transfers. "
Higher stock prices are certainly
welcome, though the volatility of the
current market regime is not. " The dayto-day
volatility might be a motivation for
some sponsors to de-risk their plans, " says
Neil Drzewiecki, head of the pension risk
transfer business at insurer MassMutual,
in Springfield, Massachusetts. " Volatility
affects funding rates and contributions,
and PBGC premiums as well. And I would
say that the portfolios of most pension
plans are not that well-matched to their
liabilities, so that volatility is a factor in
the risk transfer market, too. "
Psychologists describe a behavioral
phenomenon they call " goal gradient, "
where people accelerate their behavior
when nearing a goal. Pension sponsors
seem to be goal gradient in their buyout
activity, as illustrated above right. 2012's
last quarter was way off the chart with two
enormous annuity buyouts, by General
Motors and Verizon. But, since then,
annual activity has shown steady increases
as the finish line of plan termination
comes into view, reaching about $23 billion
in 2017, followed by $26 billion last year.
At Prudential Financial in Newark,
New Jersey, Head of Pension Risk Transfer
Scott Kaplan points to a big increase in
more modestly sized transactions-from
$250 million to $1 billion-in recent years.
But Richards predicts calm: " Without
the tax advantages for [the] large contributions
of 2017, if there are no jumbo transactions
I would expect 2019 volumes to
be flat. We've not seen big improvements
Quarterly U.S. Annuity Buyout Sales ($ millions)
$34,582
$10,000
$12,000
$4,000
$6,000
$8,000
$2,000
$0
Source: LIMRA Secure Retirement Institute
2012
2013
2014
2015
2016
2017
2018
in funded status, so we're not going to
see terminations but rather transactions
aimed at operational efficiency, and that
is a dwindling pool. "
Early 2019 brought sponsors an
unexpected liberalization of regulations,
which also could chip away at the need for
risk transfers through annuity purchases.
The IRS had previously discouraged
companies from offering lump-sum
buyouts to employees who were already
retired and receiving annuity payments
from plans, although allowing a few
companies to make these offers, after
special approval.
" That ended in the middle of March,
when the IRS abruptly reversed its position
and issued guidance saying it wouldn't
issue the new regulations [to solidify that
policy] after all, " notes McDaniel. " We're
usually pretty plugged in, but this change
came out of the blue. But it's welcome to
plan sponsors, which now have something
new in the risk transfer toolbox. "
Retiree buyouts could pose several
challenges, however-operationally, actuarially
and philosophically. " The operational
effort for a buyout is high, sending
out packets to many people, " McDaniel
says. " If you get a take rate of 50%, that
would be a success, but if it's just 5% or
10%, you would have done a lot of work
without much result. " He also points out
the potential for adverse selection: People
attracted to the lump sums might anticipate
a shorter life span, leaving those who
will grow old-a higher cost to the plan.
Regarding risk transfer and annuity
purchases in general, Richards sums up
sponsors' positive views: " I've worked
with something like 1,000 sponsors in
my career, and there are probably 100 that
have said, after a big annuity purchase, 'I
wish I had settled a bit more of the liabilities.'
But I can't name one that has ever
expressed a whiff of regret. " -John Keefe
NEXT STEPS
* Sponsors should continue their
housekeeping efforts on smallbalance
accounts to reduce
PCBG costs.
* In deliberation with actuarial
and legal advisers, a sponsor
may consider refreshing its
investment policy statement to
take advantage of favorable
market swings.
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