PLANSPONSOR - June/July 2020 - 12

UPFRONT
New Directions for PRTs
JUST as some defined contribution
(DC) plan sponsors have postponed plan
changes, due to COVID-19, defined
benefit (DB) plan sponsors may be
rethinking the timing of a pension
risk transfer (PRT).
According to Milliman,
performing a PRT has gone up
in price. The latest results of the
Milliman Pension Buyout Index
(MPBI) found that, during March,
the projected cost to transfer pension
risk to an insurer increased from 105.2%
to 105.7% of a plan's total liabilities. This
means the estimated retiree PRT cost
in March was 5.7% more than the accumulated
benefit obligation (ABO). That
increase is the result of discount rates
increasing 80 basis points (bps), compared
with a 71-basis-point rise for annuity
purchase rates, so the relative cost of annuities
climbed slightly, Milliman says.
" Plan sponsors are currently monitoring
where interest rates are, " notes Mary
Leong, a consulting actuary at Milliman
and co-author of the study. The decline
in interest rates affects not only annuity
pricing but a plan's funded status, she
points out. " It increases how much they're
going to need to contribute to go forward
with a pension risk transfer, " she says.
Plan funded status, which compares
the assets of the plan with its future liabilities-or
projected benefit obligation
(PBO)-plays a large factor in the timing
of a PRT. Plan sponsors want their plan to
be well-funded to lessen how much they
will have to contribute to transfer PBOs to
insurers. Lower interest rates result in a
higher PBO valuation, but of course plans'
funded status has been exacerbated by the
market decline caused by COVID-19.
DB plan sponsors may need to take
action to get back on track to implement
a PRT.
There are different strategies that
sponsors can employ, says Leong. For
one, they can ask their consulting actuary
whether they must increase contributions
to make up for the loss in funded status,
or whether they should delay the PRT until
the plan can recoup some of its losses,
she says. " Trying to get back on track is
a combination of markets recovering,
interest rates coming back, and making
contributions or finding some other way to
fund that shortfall or loss. "
Linda K. Stone, a senior pension fellow
at the American Academy of Actuaries,
says, to determine whether or not a PRT is
a good deal, sponsors look at the value of
the liabilities, compared with the price of
transferring that liability to an insurance
company. Plan sponsors anxious for cash
to run their business may still consider
making contributions to their DB plan in
order to implement a PRT.
The cost of maintaining their DB plan
may concern some sponsors. Stone says
many make small annuity purchases-or
implement a partial PRT-to reduce their
Pension Benefit Guaranty Corporation
(PBGC) variable premium costs. A sponsor
may implement a lump-sum payment
window for terminated, vested participants
or transfer only the liabilities of retirees
to insurers. " When you think about what
you pay administrators to maintain those
records and what you pay for fixed and
variable premiums per person, that's why
12 PLANSPONSOR.COM June - July 2020 Art by Melinda Beck
they've been transferring these smaller
amounts, " she says.
As the industry studies the long-term
effects of the pandemic post-COVID-19,
Stone observes, it will be interesting to
see how employers are making decisions.
" Looking at the pension plans and the
fallout from COVID, what we've seen is
sponsors take different actions than they
would have beforehand, as their business
situation has changed so much, " she says.
She paints two scenarios that sponsors
facing difficult plan decisions in this
environment encounter. On one hand,
handling the process of a PRT transaction
can be tough to navigate for participants.
When questioning whether to implement
a lump-sum window or purchase
an annuity for their pension obligations,
sponsors should consider administrative
issues, which can include requiring spousal
consent or notarization of documents, even
when social distancing is being practiced.
On the other hand, as more individuals
are laid off and need cash to pay bills,
offering a lump-sum window could be a
big help, Stone notes.
Leong says, " Every plan sponsor has
a unique situation, and, in this environment,
there are other factors outside of the
plan that each business is considering. "
-Amanda Umpierrez
http://www.PLANSPONSOR.COM
PLANSPONSOR - June/July 2020

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