The pension risk transfer (PRT) market skyrocketed last year, with U.S. single premium buyout and buy-in sales totaling $46.6 billion in 2021. Paula Cole, head of Nationwide Financial’s pension risk transfer business, writes in a recent blog post from Nationwide that PRTs have become increasingly popular because they can “take long-term financial liability off a plan sponsor’s books, while also saving them … money in the short-term.” Plus, a risk transfer buy-out can also reduce or remove a pension plan’s recurring administrative, actuarial, recordkeeping, and compliance costs.
Cole notes that those considering a PRT in 2022 should consider the following:
Cole points out that insurers use different pricing and interest rate assumptions from what the IRS requires plan sponsors to use when determining a plan’s funded status. How much money a plan’s trust needs to be considered fully funded by the IRS may differ from the cost of providing a group annuity contract that funds the same benefits.
It’s also important to note that, when determining how much a group annuity contract will cost, insurers will take gender, industry, future benefits, and type of work (such as blue or white collar) into consideration.
When issuing group annuity contracts, insurers require a significant amount of precise and pertinent data to ensure their bids are accurately priced. This includes not only information about participants but also about their designated beneficiaries and elected death benefits. “Insurers also require records to be shared digitally; non-electronic records are no longer accepted.”
In some instances, borrowing money to finance a PRT might be the right way for a plan sponsor to go. If so, be sure to take advantage of low interest rates before the Federal Reserve raises them later this year.
Timing is an important factor when terminating a plan. Different types of PRTs take different amounts of time to complete. If you wait until the last quarter of a plan’s year, an insurer may not be able to accommodate your request for proposal.
“There are critical partners necessary to ensure a smooth and seamless PRT,” writes Cole. “Taking into consideration how these partners contribute and interact before, during and after the process will help define success. Review a list of key partners that would include, but aren’t limited to, annuity placement advisors, recordkeepers, actuaries and legal counsel.”
Nationwide offers a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies for those seeking retirement income options for their clients as part of their bigger retirement planning pictures.
For more news, information, and strategy, visit the Retirement Income Channel.