Winners and Losers of the PRT Market Boom

The pension risk transfer market hit record-high levels last year, but the first quarter of 2024 may top those marks amid high interest rates, according to research released Wednesday from Cerulli Associates and signals from PRT providers.

In a report issued Monday by consultancy Cerulli, the firm detailed how the interest rate environment has helped the funding status of many corporate DB plans, making it a positive environment for PRT transactions. This flow through was forecast in a 2Q 2023 Cerulli study, when more than two-thirds of plan sponsors (69%) said they are at least somewhat likely to de-risk over the next 24 months.

Continued PRT transactions would be good news for asset managers and insurance carriers specializing in the risk transfer space, but may further crimp managers specializing in DB if they don’t expand their capabilities, according to Cerulli.

“Asset managers that can assist with de-risking efforts, including providing advice on glidepaths, are well positioned to capture corporate DB assets,” says Agnes Ugoji, a Cerulli analyst. “As corporate DB plans represent a diminishing opportunity, asset managers should look toward other institutional channels, particularly insurance general accounts and endowment and foundation clients.”

Average corporate pension funding has steadily increased from 98.9% in 2021 to 102.2% in 2022 and 104.4% in Q3 2023, according to Cerulli’s report. Those increases were matched by PRT transaction volume of 444 in 2021, 568 in 2022 and 773 in 2023.

Meanwhile, those in the DB space will likely see funded status either flatline or decrease when the Federal Reserve can finally start bringing rates down, the consultancy noted, which could start to curtail this market. When that comes, asset managers who can adjust to lower rates by way of funding may have opportunity.

“High-yield managers and alternative managers will be adequately equipped to support these clients,” Ugoji says.

Even when rates come down, though, the firm noted that the PRT market still may stay strong in part becuase plan spnosors that didn’t transact amid high rates have made investment changes taking advantage of higher rates. 

Transfers To Continue

Given the improvement in pension funding levels, it makes sense that more funds are de-risking and have a higher demand for fixed income or annuity setups now, says Anthony Woodside, head of multi-sector fixed income and investment strategy at LGIM America.

“When you’re underfunded what you generally see is a higher allocation to risk seeking securities such as equities and things along those lines,” Woodside notes. “The closer you get to being fully funded is when you typically see a more conservative allocation and go toward liability-hedging, which is fixed-income securities.”

Actuarial and investment consulting services firm, Agilis believes the trend will see the PRT market for last quarter topping last year’s record in terms of premium volume, if not amount of transactions.

“We expect that the premium volume for Q1 2024 will be the largest on record [doubling the last high watermark], led by two jumbo transactions for Shell and Verizon that collectively transferred almost $11B in pension liabilities to insurers,” says Michael Clark, chief commercial officer of Agilis.

Clark notes that, while the premium volume of pension buy-outs was actually down last year compared to 2022, the total number of transactions increased by almost 25% year-over-year.

Cerulli’s report also noted that, over the last decade, more insurance carriers have come online to support the expanded PRT market, jumping from 10 in the past to 21 today. The firm believes legacy players have a competitive advantage over newcomers due brand recognition, reputation, and ability to “handle complex plan designs” and “enhanced customer service capabilities.”

On Tuesday, one of those relatively new entrants announced sales growth that shows there is some wealth to go around. F&G Annuities & Life Inc. announced cumulative PRT sales of over $5 billion since it launched the service in June 2021. That channel now covers 100,000 total participants, including beneficiaries, who will get pension payouts from F&G, according to the institutional and retail insurance and annuity provider.

“F&G has developed an efficient and effective approach to how we successfully design, execute and close pension risk transfer transactions alongside our consultant and plan sponsor clients,” Jay Dinunzio, senior vice president of PRT sales and operations at F&G, said in a statement. “Successful PRT transactions require strong intermediary relationship management, competitive product pricing and outstanding post-sale administration conversion execution.”

Risky Business

There are different flavors of PRT, with firms using lump-sum payments, annuity buyouts (transferring the assets to an insurance company) or buy-ins (a group annuity purchase) and longevity swaps. Clark sees most plan sponsors opting for lump sum cash outs or annuity buyouts and buy-ins—both for pension de-risking and full plan terminations.

Cerulli came to the same conclusion, noting that of the four main strategies, 43% of plan sponsors say they would use a combination of lump-sum payments and annuity buyouts in the case of plan termination.

Clark notes there are some headwind items that Agilis is watching in terms of PRT market trends.

One is a report to Congress from the Department of Labor analyzing Interpretive Bulletin 95-1, which outlines the process for pension plan fiduciaries to evaluate insurers when it comes to offering annuities. The report, which was due at the end of 2023, is being closely watched by the industry for changes to how it might impact the current approach to PRTs—with some insurance groups saying it may have a chilling effect on DB risk transfers.

Meanwhile, there have been a spate of lawsuits recently filed against companies that have implemented pension risk transfers via annuity buy-outs alleging a breach of fiduciary duty. The latest was filed April 12, with Schlichter Bogard LLP filing against Alcoa corp. regarding a pension risk transfer conducted with Athene Annuity & Life Co. between 2018 and 2022. Attorney Jerome Schlichter has filed similar suits against AT&T Inc. and Lockheed Martin in the past few months, both accusing Athene of being an “unsafe” insurer.

“Despite these concerns, pricing still looks favorable to plan sponsors and insurer appetite is strong,” Clark says. “With the growth in the market, we expect to see more insurers enter the pension risk transfer market which should increase competition, open up capacity, and drive attractive pricing.”

In addition, he notes, with annuity purchases booming due to higher interest rates, he says Agilis is also seeing interest from public sector pension plans, multiemployer pension plans, and church plans in de-risking, showing perhaps new entrants to the market.