CONTENTS
This Guide provides current industry perspectives and practical guidelines to help pension plan sponsors and fiduciaries understand pension risk transfer (PRT) solutions, from explaining PRT and the benefits of a transaction, to how sponsors should select an insurance partner and implement a PRT solution.
- PRT is a valuable tool for plan sponsors seeking to protect participants and transfer financial risk.
- PRT annuitants benefit from enhanced security in annuities backed by a more stable, diverse asset pool.
- The market has evolved to provide the capacity and operational capabilities required to support even the largest and most complex PRT transactions.
- Regulatory and market infrastructure has matured to enable seamless deal execution and benefits administration.
DEFINING PENSION RISK TRANSFER
Pension risk transfer is a solution for a defined benefit pension plan to lock in participant security by transferring some or all of its financial obligations to vested pension plan participants to an insurer. The solution enables plan sponsors to purchase a group annuity insurance contract from an insurance company which, in turn, takes over all future benefit obligations to plan participants in exchange for an upfront premium from the plan trust. This option has grown in popularity over the past decade as sponsors seek to focus on their core business and meet legacy obligations in a way that ensures participant protection and continuity of service, and eliminates residual risk, administration, recordkeeping and resource management.
The PRT market has surged to record activity over the past five years as corporate pension funds have seen solid improvements in funded status. It has put them in a stronger position to consider paths to lock in participant security through solutions that move pension liabilities off their balance sheets and over to insurers that are well positioned to guarantee retirement income. Corporate funded status has continued to improve even in 2022, as equity market declines were more than offset by liability reductions from the impact of rising rates.
While both active and closed or frozen pension plans can consider a PRT, the majority of plans that have completed these transactions are closed to new participants or fully frozen with respect to existing participants.
*Source: Secure Retirement Institute®, U.S. Group Annuity Risk Transfer Annual Reports—Buy-Out and Buy-in transactions.
Source: Athene.
Types of PRT Transactions
- A buy-in is a group annuity purchase from an insurer that covers benefit payment reimbursements to the plan trust for a specific covered group of plan beneficiaries, or for the total population covered under the plan. The group annuity contract is held as an asset of the pension plan, the benefit obligations remain on the plan sponsor’s balance sheet and the sponsor retains fiduciary and administration obligations.
- A buyout is a group annuity purchase from an insurer that covers direct benefit payments to a specific covered group of plan beneficiaries or for the total population covered under the plan. The obligations with respect to the applicable population covered by the group annuity contract are fully transferred to the insurer, and the insurer is fully responsible for administration of such benefits.
In a buy-in, the pension plan continues to pay each member of the covered group directly, and the plan sponsor also continues to pay the required Pension Benefit Guaranty Corporation premiums.
For a detailed breakdown of the benefits of buy-in transactions, read:
The Benefits of Pension Group Annuities to U.S. Retirees
Current Trends in PRT
Pension risk transfer has evolved and grown substantially over the past decade as insurers have the investment capabilities, capital and innovative solutions to meet the growing needs of corporate sponsors. Some key industry trends are outlined below.
Insurance Market Capacity
Over the past five years, PRT demand by corporate plans has increased substantially and is poised to accelerate further given increased pension plan funding levels. Over the same period, the insurance market has stepped up to provide increased capacity with the number of insurers offering PRT doubling to 20 insurance companies in the U.S. market today. Given the substantial growth that is anticipated, insurers will need to continue to adapt and raise capital to meet the demand for PRT from corporate sponsors.
Additionally, insurers continue to invest in and scale operational capabilities to absorb the next wave of transactions, which will undoubtedly include deferred lives, with some insurers outsourcing administration to the same third-party providers that many plans are already using.
Transaction Profiles
Historically, most PRT transactions have been driven by a desire to reduce administrative expenses such as PBGC premiums, with a focus on incremental and often smaller transactions for segments of the retired population. However, as many plans have become fully funded, there has been growth in full plan terminations – whereby benefit obligations are fully transferred to an insurer for all segments under the plan, including both retirees in pay and deferred participants.
Plan terminations bring added complexity with the need to coordinate financial risk management with a lengthy regulatory timeline. “There’s a chicken-and-egg scenario when sponsors decide to execute these plan terminations, in not knowing the annuity price ahead of the regulatory process,” said Richard McEvoy, senior vice president and pension group annuity leader at Athene. “We have developed an innovative approach to address this issue by adapting the buy-in process to plan terminations.”
In the buy-in process for plan terminations, a plan sponsor can secure annuity pricing certainty in the initial stages of plan termination, thereby eliminating a significant source of execution and financial risk early in the process.
Evolution of Investment Portfolios
Investment portfolios that back pension liabilities have become more robust. The fixed income investment landscape has evolved due to broad demand for more income, yield and diversification driven by demographics and capital markets. The low-rate environment of the last decade led insurers to invest more in private markets, where they could generate excess return through high-quality assets, generally as a function of structure or liquidity. This has allowed insurers to meet their beneficiary return obligations without increasing risk to prior plan participants and beneficiaries.
The liquidity profile of insurers is purposely designed for annuity obligations that are paid out over several decades. Many pension sponsors need liquidity to retain the flexibility to undertake partial buyouts or full plan terminations in coming years. Insurers, by comparison, do not face the same liquidity constraints as pension plans, and they may have liquidity pooling advantages across a broad swath of former pension plans. These advantages enable insurers to better match asset and liability liquidity, allocate to a broader array of opportunities across private and public markets and diversify among more borrowers to mitigate the corporate concentration risk inherent in many pension portfolios.
For Athene and Apollo, in particular, expansive origination platforms go further to lower intermediation costs and enable greater underwriting control and structural protections of the underlying assets.1 These advantages in fixed income investing generate enhanced and diversified returns that support better PRT economics for the plan sponsor and benefit security for retirees.
Section I footnote
1 In January 2022, Apollo and Athene announced the successful completion of their merger under Apollo Global Management, Inc. (NYSE: APO), a high-growth alternative asset manager with asset management and retirement services capabilities. See: https://www.apollo.com/media/press-releases/2022/01-03-2022-120051006
BENEFITS FOR PARTICIPANTS
Securing participant benefits is the key consideration for transacting a PRT. Under the Employee Retirement Income Security Act (ERISA), plan sponsors are required to structure a PRT so that the insurer provides matching plan options and benefit levels, with no reduction in benefits.
Insurers are in the business of securing the obligations they underwrite as their number one priority. Unlike pension plans, insurers hold regulatory capital to safeguard their ability to keep commitments to policyholders, with oversight and standards enforced by insurance regulators and rating agencies.
In addition to capital requirements, the PRT transaction process is governed by specific U.S. Department of Labor guidance and fiduciary requirements to rigorously analyze and, ultimately, determine that the chosen insurance carrier meets “safest available” criteria. See more details in Section IV.
Separate accounts are another measure taken by some insurers to protect PRT annuitants. By holding assets that back annuity liabilities in separate accounts that are insulated from general account claims, PRT annuitants are provided a key structural protection and another layer of security.
In contrast to these layers of insurance protection, since the passage of ERISA, plan sponsors have been permitted to smooth and defer pension contributions over many years. In many cases, companies have elected to do so to focus capital and cashflows on their core businesses. In addition, pensions are given latitude to invest in growth and risk-oriented assets to help defray their benefit costs over time. Thus, the risk profile and volatility in funding levels of pensions as compared to the relative stability of insurance reserves and capital supports the relative security of PRT annuitants compared to pension plan participants.
PRT participants and policyholders have absolute priority over other sources of insurer funding, which are available to absorb financial stress.
Finally, pension administration practices vary by plan in nature and quality, and specialist skills may be in shorter supply as these plans mature. The PRT business, in contrast, is heavily invested in the quality and sustainability of its administration, allowing retirees to feel secure knowing that the operational oversight and security of their benefits is in safe hands.
1Average rating of companies that have entered into pension risk transfer transactions with Athene.
296% of AFS fixed maturity securities rated NAIC 1/2 as of December 31, 2022.
3Financial strength ratings for Athene Annuity & Life Assurance Company, Athene Annuity and Life Company, Athene Annuity & Life Assurance Company of New York, Athene Life Re Ltd. and Athene Annuity Re. S&P, Fitch, A.M. Best’s and Moody’s credit ratings reflect their assessment of the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. S&P rating as of December 2022 (A+, 5th highest out of 21), Fitch rating as of May 2022 (A+, 5th highest of 19), A.M. Best rating as of April 2022 (A, 3rd highest of 16) and Moody’s rating as of July 2022 (A1, 5th highest of 21). Athene Holding Ltd.’s credit rating is A-/A-/bbb+ for S&P, Fitch and A.M. Best, respectively.
4As of December 31, 2022. Represents the aggregate capital of Athene's US and Bermuda insurance entities, determined with respect to each insurance entity by applying the statutory accounting principles applicable to each such entity. Adjustments are made to, among other things, assets and expenses at the holding company level.
5 The individual subsidiary insurance company is responsible for meeting its ongoing insurance policy and contract obligations. AHL is not responsible for meeting the ongoing insurance policy and contract obligations of its subsidiary insurance companies.
Source: Athene
Proof statement
Benefits for participants are not simply academic. Not a single PRT retiree or beneficiary has had their benefits cut since DOL 95-1 was issued.2 By comparison, under the ERISA regulatory environment, there have been more than 3,000 distress plan terminations over the same period involving more than 2 million participants, many of which have seen a reduction in benefits as a result. Indeed, in the 2020 JCPenney bankruptcy, plan participants were on the verge of benefit reductions until Athene stepped in with a PRT solution. See details in Section IV.
2 National Organization of Life and Health Insurance Guaranty Associations, Consumer Protection Comparison, the Federal Pension System and the State Insurance System, 2016. https://www.nolhga.com/resource/code/file.cfm?ID=2559
1. The Morning Call, 2003
2. PLANSPONSOR, 2004
3. PBGC, 2020
4. U.S. Government Accountability Office, 2012.
5. Forbes, 2010
6. PBGC, 2020
7. National Organization of Life and Health Insurance Guaranty Associations Report, 2016
Source: Athene
BENEFITS FOR PLAN SPONSORS
For example, PRT:
- Locks in participant security and gives sponsors peace of mind that their retirees are serviced by best-in-class administrators.
- Allows companies to focus on what they do best: their core business.
- Decreases plan size relative to company balance sheet.
- Leverages expertise of insurance company in managing annuity obligations.
- Provides beneficial economics from market competitiveness and investment enhancements.
While equity markets have paid off over the past decade, pensions have continued to contend with pronounced volatility due to under-hedged interest rate risk. Volatility in pension funded status is a burden that many sponsors no longer want to bear, particularly as many pensions are now at, or near, fully funded status.
An insurance company that is well versed in complex estimations and assumptions around longevity risk and retirement patterns through liability management can be a reliable partner for a PRT. The transaction allows corporations to remove the risks associated with their legacy pension obligations and focus on their core business and operations. While doing so, they can meet all their fiduciary obligations and ensure that participant security is not compromised in any way.
In addition, as the PRT market has become more competitive over the past decade, plan sponsors have seen economic benefits through lower transaction clearing prices. Further, as insurers collaborate more with asset managers, the investment and diversification opportunities, especially in private markets, have further enhanced the economics for plan sponsors and lowered risk assumed by insurers and, therefore, by the retirees they protect.
In addition to PRT strategies, corporations have pursued a range of investment strategies including liability-driven investing (LDI) to reduce the risks associated with pension fund management. LDI has helped many plans achieve fully funded status. Yet, investment solutions are not failsafe, as evidenced in October 2022 by the extreme stress suffered by U.K. pension plans whose LDI strategies failed during an extreme volatility spike in the U.K. gilt market.
“LDI provides some risk mitigation on the asset front, but it’s not complete,” said Sean Brennan, executive vice president of Pension Group Annuity and Flow Reinsurance at Athene. “While LDI is a significant improvement over some of the other risk mitigation strategies used by pension funds, it’s not without risk, and it still will require the attention of CFOs and Treasurers, often when they have the least time to spare.”
The episode in the U.K. exposed challenges in LDI strategies and has encouraged some U.S. plan sponsors – particularly those that are fully funded – to explore pension risk transfer. Brennan said that plan sponsors are drawn to the benefits of reducing their overall risk management, followed by resourcing and specialization considerations. When managed internally, corporate pension plans face market risk, interest rate risk and unexpected changes to estimated liabilities due to demographics and participant longevity.
EVALUATING AN INSURANCE PARTNER
The insurance industry and intermediaries have risen to the challenge of substantially increased volume in PRT transactions over the past decade. Market growth has resulted in positive innovations and solutions but has also led to misinformation around the benefits and security that PRT brings to plan participants. Sponsors and fiduciaries need to separate fact from fiction by performing rigorous independent and data-based due diligence on their insurance counterparties with the assistance of qualified insurance advisers and, in many cases, independent fiduciaries.
Additional DOL Guidance and Protections
Insurance regulations impose robust capital requirements on insurers. For PRT, in particular, regulators impose additional requirements and guidance for pension fiduciaries in choosing a qualified insurer. Pursuant to U.S. Department of Labor Interpretative Bulletin 95-1,3 fiduciaries are required to consider “a number of factors relating to a potential annuity provider’s claims-paying ability and creditworthiness,” which are laid out in the guidance, with the ultimate goal of selecting the “safest annuity available.”
According to the guidance, pension plans should meet certain fiduciary standards when selecting an annuity provider for a PRT, which include:
- 1. The quality and diversification of the annuity provider's investment portfolio
- 2. The size of the insurer relative to the proposed contract
- 3. The level of the insurer's capital and surplus
- 4. The lines of business of the annuity provider and other indications of an insurer's exposure to liability
- 5. The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts
- 6. The availability of additional protection through state guaranty associations and the extent of their guarantees.
- Read more: Pension Group Annuities
Fiduciary and Advisory Support
Independent fiduciaries have been retained for the majority of sizable U.S. PRT transactions. They have substantial expertise and analytical tools to evaluate the relative security of PRT transactions and specific insurers. They undertake broad, fact-based analyses of insurers specific to PRT security that goes above and beyond the oversight undertaken by rating agencies and other stakeholders. They thoroughly evaluate the specific combination of protections associated with each provider, including measures of balance sheet strength, business profile, operational readiness and other protections relating to annuity structure and state guarantees to identify the “safest available annuity” that protects participants from loss.
In addition to independent fiduciaries, the continued health and maturity of the PRT market is bolstered by consultants who are extremely well versed both in meeting the needs of plan sponsors and in evaluating insurers to safeguard participant security. Consultants offer specialized PRT services in two key ways:
- Provide guidance and oversight of strategy and process management
- Assist the fiduciary, that is often independent, in the insurer evaluation process
“Participant security should absolutely be top of mind when selecting an insurer,” said McEvoy. In addition, “qualified advisors play a valuable role helping plan sponsors separate fact from fiction when it comes to participant safety.”
Plan sponsors should look for consultants with an in-depth knowledge of insurers so they can effectively support provider evaluation. Consultants must also have the experience to take a client through the full transaction process — from the decision to pursue a PRT transaction to the signing of the contract to the ultimate transfer of beneficiary obligations.
PROFILE OF AN INSURER: ATHENE
95-1 Review Considerations
Since Athene entered the PRT market in 2017, it has completed more than 40 PRT transactions totaling more than $40 billion in premiums. Athene combines its depth of expertise in retirement services with Apollo’s asset management expertise across the credit markets. This combination of investment opportunity and capital will help the organization meet the coming wave of PRT activity.
Insurer selection is more complex than ‘checking the box’ on a set of metrics; it is a careful evaluation of an insurer’s ability to meet its solemn promise to protect participants. Not all factors are equally important to participant safety, and some factors interact and cohere to be more than the sum of their parts.
Athene excels at the two most significant of the six DOL 95-1 determinants of participant safety — level of capital support and structural protection offered by separate accounts. In addition, the insurer’s administrative support model is a crucial element of due diligence for these transactions.
To provide a flavor for the evaluation process that fiduciaries undertake, Athene’s characteristics relative to the DOL 95-1 considerations are outlined here:
1 Department of Labor 95-1 Criteria.
2 96% of Available for Sale fixed maturity securities rated NAIC 1/2, as of December 31, 2022.
3 Net reserve liabilities as of December 31, 2022.
4 Financial strength ratings for Athene Annuity & Life Assurance Company, Athene Annuity and Life Company, Athene Annuity & Life Assurance Company of New York, Athene Life Re Ltd. and Athene Annuity Re. S&P, Fitch, A.M. Best’s and Moody’s credit ratings reflect their assessment of the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. S&P rating as of December 2022 (A+, 5th highest out of 21), Fitch rating as of May 2022 (A+, 5th highest of 19), A.M. Best rating as of April 2022 (A, 3rd highest of 16) and Moody’s rating as of July 2022 (A1, 5th highest of 21). Athene Holding Ltd.’s credit rating is A-/A-/bbb+ for S&P, Fitch and A.M. Best, respectively.
Source: Athene
Level of Insurer’s Capital and Surplus
Athene holds over $20 billion of regulatory capital5 and is one of the largest and best-capitalized U.S. life insurance companies. It is also less levered, with an adjusted debt-to-capital ratio of 16% as of December 31, 2022 compared to the ~25% industry average. This creditworthiness continues to be recognized by independent credit rating agencies, even in the recent market environment. In May 2022, Fitch upgraded Athene’s financial strength rating from “A” to “A+”. In July 2022, Moody’s assigned a financial strength rating to Athene for the first time, assigning an “A1” to its primary insurance subsidiaries. Today, Athene’s financial strength ratings of its primary insurance subsidiaries are “A+” from S&P, “A1” from Moody’s, “A+” from Fitch and “A” from A.M. Best.
Structure and Supporting Guarantees - Separate Account Protections
Athene is the only large PRT insurer to have placed all its PRT assets into separate accounts, substantially increasing the level of security provided to PRT participants. Unlike most insurers, Athene also ensures all separate accounts are fully funded at inception and maintains full funding over the contract life. While insurer failures are extremely rare and no PRT provider has ever become insolvent, as fiduciaries are evaluating the relative merits of different factors in comparing insurers, separate accounts meaningfully increase participant security in relative terms.
Quality and Diversification of Investment Portfolio
The collaboration between asset managers and insurers to help fund PRT transactions, as opposed to the traditional approach of insurers financing transactions with their own capital, has broadened the scope of insurers to execute larger and more complex transactions.
As Athene has grown rapidly to be a leader in PRT transactions in the U.S., it has maintained a highly capitalized and conservatively invested approach. Keeping a strong focus on participant security as its top priority, it maintains 96% of its portfolio in investment-grade fixed income.6
“As the largest alternative fixed-income manager globally,7 Athene, together with Apollo, brings a huge amount of expertise and capability to deliver better economics to our clients within a robust risk management framework,” said McEvoy.
Size of Insurer Relative to Proposed Contract
Athene is one of the world’s largest and fastest-growing life insurers, with nearly $200 billion of assets supporting clients. It grew 19% in GAAP assets per year from 2017-2022. Athene has the scale and growth trajectory required to support even the largest PRT transactions.
Insurer’s Line of Business and Other Indications of Liability Exposure
Athene has built a diversified business with immaterial exposure to the complex and risky insurance products that have resulted in destabilizing losses for other insurers. Athene’s relatively limited insurance risk is naturally diversified across the segments in which it operates; for example, the scenarios that would increase the cost of pension group annuities would have almost no impact on its retail annuity business.
Athene’s Administration Servicing Model
In order to ensure that participants are provided with outstanding service, Athene partners with several best-in-class third-party administrators, including Conduent, Alight and Northern Trust.
Those that have selected Athene for PRT transactions include plan sponsors for Lockheed Martin, Alcoa, General Electric, JCPenney, Bristol Myers Squibb and MillerCoors. The success of Athene’s participant servicing model has led to Athene having several repeat customers for PRT transactions over the years, with clients such as Lockheed Martin and Alcoa.
For supplemental financial information please review non-GAAP definitions and reconciliations.
CASE STUDY OF AN ATHENE PRT TRANSACTION
In 2021, Athene closed a PRT transaction with JCPenney for its full plan termination. As the company was in bankruptcy, the potential of a distressed plan termination and potential takeover by the PBGC would have exposed its plan participants to face material cuts to their benefits.
“[JCPenney] was confident that we would have the solutions orientation to be able to provide them with a good outcome, not only on the liability side but also because they had a fair amount of illiquid assets that needed to be valued to ensure a viable transaction,” Brennan said. In addition, JCPenney had a short timeframe to explore a solution that would protect their retirees’ benefits. Athene was able to execute a solutions-based transaction for the pension trust, which included the sponsor’s private markets portfolio, and fully guaranteed all participant benefits.
Athene offers a unique value proposition for plan sponsors considering a PRT transaction, bringing deep experience, favorable pricing, customized solutions, prioritization of beneficiary protection and a commitment to providing outstanding service to participants.
Section IV footnotes:
3 U.S. Department of Labor, “Interpretive Bulletin No. 95-1,” March 6, 1995. https://www.govinfo.gov/content/pkg/FR-1995-03-06/pdf/95-5321.pdf
4 In January 2022, Apollo and Athene announced the successful completion of their merger under Apollo Global Management, Inc. (NYSE: APO), a high-growth alternative asset manager with asset management and retirement services capabilities. See: https://www.apollo.com/media/press-releases/2022/01-03-2022-120051006
5 Represents the aggregate capital of Athene's US and Bermuda insurance entities, determined with respect to each insurance entity by applying the statutory accounting principles applicable to each such entity. Adjustments are made to, among other things, assets and expenses at the holding company level.
6 96% of Available for Sale fixed maturity securities rated NAIC 1 / 2, as of December 31, 2022.
7Apollo Global Management's Investor Day, October 19, 2021. https://www.apollo.com/~/media/Files/A/Apollo-V3/press-release/2021/apollo-investor-day-2021-presentation.pdf, page 34.
PREPARATION FOR IMPLEMENTATION
There are a number of important considerations in preparing for a PRT implementation including governance roles, investment strategies for assets backing the remaining plan, resource planning, participant data quality and privacy, legal agreements and participant communication.
Governance
The process to undertake a PRT should begin with all related fiduciary roles and responsibilities being clearly assigned across all appropriate stakeholders. In many cases, one corporate executive could wear two hats: as plan sponsor and as fiduciary. In the case of a PRT, however, the two roles must be clearly specified: the plan sponsor should be responsible for the strategy setting and determining how best to prepare and execute the PRT transaction while the fiduciary should be responsible for evaluating the financial security of insurance companies being considered. Typically, an independent fiduciary or independent expert is retained to assist with fulfilling fiduciary responsibilities.
Investment Strategy for Assets Backing the Remaining Plan
As plan sponsors enter the PRT process, they need to carefully consider the impact on their overall remaining investment portfolio and its interest rate hedging approach. Given that plan liabilities change in response to shifts in interest rates, most sponsors have developed hedging strategies that need to be adapted from the pre-transaction to the post-transaction phase.
Many of these transactions are also executed through asset-in-kind transfers, where a plan sponsor finances a part of a group annuity purchase through a conveyance of securities, typically fixed income, to the insurer. Since insurers tend to buy similar assets to immunize their obligations under the agreement, asset-in-kind transactions are cost-efficient by reducing transaction fees and enabling smoother risk hedging through the process.
Preparation sometimes needs to start early in the planning process for asset-in-kind transactions, particularly for plans that have private market assets. This is often coordinated with the pension plan’s liquidity needs. For instance, some sponsors may be in wind-down mode, with a lump-sum distribution planned. When engaged in a PRT, sponsors need to be careful that they don’t transfer all liquid assets while retaining illiquid assets, which could create a potential liquidity problem.
Resource Planning
Resource planning by the plan sponsor is a key element for the successful completion of a group annuity purchase. The plan sponsor’s administration team and the independent fiduciary negotiate key contract elements, including business and legal terms, with each of the insurers involved in the bidding process. After an insurer is selected, the efforts shift from a negotiation of business terms to a collaborative process among the plan sponsor, its current administrative provider and the insurer to draft a comprehensive description of the applicable payment forms and benefits for all participant beneficiaries under the transaction.
From the insurance company’s standpoint, it is important to conduct weekly calls during which the plan administration team can respond to process questions and ensure accurate collection and verification of participant data. Commonly, weekly calls are held until the first direct payment is made, at which point calls are scheduled as determined by the appropriate parties.
“The focus is on data validations and corrections identified through the data scrubbing process to examine data elements that can impact the group annuity contract premium pricing,” said Tracey Weber, vice president of PRT implementation at Athene.
Participant Data
Participant data accuracy has considerable influence over the PRT process and its pricing, and there is a spectrum of data quality among plan sponsors who undertake such transactions. Some start on data cleanup and consistency earlier than others, particularly if they are guided by experienced consultants.
- Pre-selection data
○ Reliable participant data that will not need to be scrutinized and modified later on; enables the insurer to provide a reliable price upfront.
○ Mortality experience data, particularly for mid- to large-size transactions. More data on longevity risk requires less of a risk premium. - Post-selection data
○ After the insurer is selected, detailed participant data with as many variables accounted for as possible. - Onboarding data
○ Finalizing the participant data file prior to the first direct payment: The plan administrator and the insurer’s third-party administrator work to locate and scrub all participant data (find and replace missing information such as address, age, social security number, tax withholding, etc.)
○ Finalizing participant data on all special cohorts (e.g., foreign workers or deferred participants’ sample calculations, etc.)
Data Privacy
Prior to the selection of an insurer, the plan sponsor’s census file does not contain any personally identifiable information (PII). It includes data needed from a pricing perspective, such as gender, date of birth, payment form and payment amounts. Each record is assigned a generic ID for ease of reconciliation going forward. Post-insurer selection, each record is updated with the PII to cross-reference and ensure accuracy. At all stages, secure transfer of data is paramount.
Legal Agreements
In a PRT, the drafting and negotiation of legal agreements occurs both prior to the insurer selection date as well as after selection. Customarily, three primary documents are created and executed.
- Commitment Agreement: A document that sets out the parties' intent to enter into a group annuity contract.
The Commitment Agreement is executed on the insurer selection date by the plan sponsor, the insurance company and, in many cases, the plan fiduciary. It binds the parties to enter into a group annuity contract once it has been approved by any applicable state regulatory agency, and the obligation is subject to the transfer of the premium to the insurance company on the closing date.
Prior to the insurer selection date, the plan sponsor and, if applicable, the plan fiduciary, fully negotiate all legal and business terms of a commitment agreement with each insurer that is involved in the bidding process. By the date of insurer selection, no further negotiation is needed and at the closing date – typically one week later – the plan sponsor transfers the premium to the selected insurance company. - Group Annuity Contract (GAC): A document by which the insurance company becomes legally responsible for paying benefits previously covered by the pension plan.
The GAC is signed by the plan sponsor, as contract holder, and the insurance company, which issues the contract. The contract provides that even if the plan sponsor ceases to exist, the insurer maintains its full obligation.
Prior to the insurer selection date, the plan sponsor and, if applicable, the plan fiduciary, negotiate all critical legal and business terms of a group annuity contract with each insurer that is involved in the bidding process. After an insurer is selected, the plan sponsor, its administration team and the selected insurance company collaborate to draft a detailed description of applicable payment forms and benefits for all covered participants. “It is critical to ensure that the GAC preserves the exact same benefits provided to participants under the pension plan. A contract lasts for decades, so it’s crucial that the details of the benefits are clear, complete and unambiguous,” said Karen Braga, vice president, legal at Athene.
Completing the GAC can take anywhere from six to eight weeks to several months, depending on the deal’s complexity. Lags in timing could arise from working out details for deferred participants or handling coverage across multiple sub-plans under the pension plan.
Insurers must be up to date with all filing requirements, which can vary by state in specific elements or by the timing of the process, which must be clearly articulated to all stakeholders in each transaction. - Annuity Certificate: A document issued by the insurance company to each participant covered by the GAC when buyout transactions are completed and upon conversion of a buy-in.
The annuity certificate includes a summary of all the pertinent terms of the GAC as well as a detailed description of the individual certificate holder’s rights and benefits under the contract. The details of the individual benefits are also specified in the signed GAC, within the annuity exhibits and lifted directly into the annuity certificate. Certificates are mailed after the GAC is executed and all applicable state regulatory approvals have been obtained.
“Athene considers two sets of clients when we approach PRT transactions: the plan sponsor and the participants,” said Braga. Following the firm’s extensive experience executing group annuity contracts, Athene aims to provide plan sponsors with an efficient and streamlined process and to conduct an intensive review of participant benefits to finalize precise language in the GAC that minimizes any confusion on the part of the participant.
Deferred Participants
For group annuity contracts that include deferred participants — active employees or early retirees who have not yet commenced benefits — additional time and resources are spent by both parties to understand how these benefits are administered and the specific plan provision or nuances that are relevant to this population. With more plan sponsors considering full-plan terminations that include deferred participants, appropriate resource planning is a key consideration to achieve a smooth transition.
Participant Communication
Buyout transactions involve a series of participant communications, starting with the plan sponsor’s initial transition letter that introduces the insurance company to the participants. At Athene, it is followed by two main touchpoints:
- Welcome kit, with details on the transaction and contact information via its third-party administrator. Prior to delivery, it is reviewed jointly by the plan sponsor and the insurer to ensure it includes all relevant information on pension benefits.
- Annuity certificate that details the insurer’s obligation under the contract and the participants’ specific rights and benefits.
After the welcome kit is mailed, both the call center and the insurer’s website become live, with the insurance company taking over future benefits administration. Any calls at the time of transition made to the plan sponsor’s current administration team, or any pending tasks around address changes or death claims, are sorted and handled by the insurer in consultation with the plan sponsor.
The insurer needs to be responsive on transactions in process or questions around information both in the welcome kit and in the annuity certificate.
“To ensure a seamless experience for participants, Athene conducts a detailed review of participant benefits prior to the transition, ensures rigorous training to its call center representatives and provides easy access to online and call center help to participants,” said Weber.
Having a collaborative process for the transition that includes the current administration team, outside legal team and other advisors is helpful in bringing a wealth of knowledge into the transition discussions, said Braga. That is crucial in the case of full-plan terminations that include deferred participant benefits. “You’re taking over benefits that will continue for 20, 30, 40 or more years into the future, so you want to ensure that there’s no ambiguity in the contract language and that there’s no question from a participant’s perspective that they will continue to receive the exact same benefit coverage they’ve earned under the pension plan,” Braga said.
ADDITIONAL RESOURCES
GLOSSARY
Annuity certificate
Under a group annuity contract, a legal document from the insurance company that is issued to each covered participant that details their annuity payment under the contract.
Asset-liability matching
An investment strategy that matches investment income with the scheduling of anticipated future expenses. Pension funds commonly use asset-liability matching to help ensure coverage of current and future pension benefits to plan participants.
Asset-In-Kind transaction
A type of group annuity purchase financed partially by the plan sponsor via a transfer of securities, typically fixed income, to the insurer.
Buy-in
A group annuity purchase from an insurer that covers benefit payment reimbursements to the plan trust for a specific covered group of plan beneficiaries, or for the total population covered under the plan. The group annuity contract is held as an asset of the pension plan; the benefit obligations remain on the plan sponsor’s balance sheet, and the sponsor retains fiduciary and administration obligations.
Buyout
A group annuity purchase from an insurer that covers direct benefit payments to a specific covered group of plan beneficiaries, or for the total population covered under the plan. The obligations with respect to the applicable population covered by the group annuity contract are fully transferred to the insurer, and the insurer is fully responsible for administration of such benefits.
Commitment agreement
A legal document that sets out the intent of the parties thereto, typically a pension plan sponsor and an insurance company, to enter into a group annuity contract.
Deferred participant
A company employee employed for a sufficient length to accrue vested benefits in a pension plan but no longer accumulating pension benefits, and not yet in pay regarding those benefits.
Frozen plan
When an operating pension plan freezes the plan benefits and stops all future benefit accruals.
Full-plan termination
When a pension plan transfers its pension benefit obligations, for all participants—active and deferred—to an insurer via a group annuity purchase.
Funded status
The fair value of a pension plans' assets divided by the present value of its liabilities or projected obligations to beneficiaries. When assets cover expected liabilities, the plan is regarded as fully funded. Conversely, it is underfunded when liabilities exceed the plan's assets.
Group annuity contract
A legal document between a pension plan sponsor and an insurance company under which the latter takes over benefits payments to participants.
In-pay
The status of pension plan participants that are retired and are receiving pension payments.
Liability-driven investing
An investment approach designed to minimize asset liability risk in a pension plan, so that it can meet all current and future liabilities. This can be combined with a de-risking glidepath whereby the portfolio composition shifts as the plan gets closer to full funding.
Lump sum payment
One-time payment offered to pension plan beneficiaries that replaces their lifetime benefits.
Multi-employer pension plan
A pension plan managed by more than one employer, typically within the same or related industries.
Pension risk transfer
A decision by a defined benefit pension plan to lock in participant security by transferring some or all of its financial obligations to vested pension plan participants to an insurer. Examples are a group annuity contract where an insurer takes over the pension obligations in exchange for an upfront premium, or an lump-sum distribution made directly to plan participants.
Quiz
Test your knowledge on Pension Risk Transfer based on the information provided in this Guide. It offers a brief recap of key areas of information related to PRT.
Group annuity contracts are issued by Athene Annuity and Life Company, West Des Moines, IA, in all states (except New York), and in D.C. and PR. For New York residents and New York contract-holders, group annuity contracts are issued in New York by Athene Annuity & Life Assurance Company of New York, Pearl River, NY. Payment obligations and guarantees are the sole responsibility of, and are subject to the financial strength and claims-paying ability of, the issuing insurance company. Products may not be available in all states.
- This article does not constitute an offer to sell, or the solicitation of an offer to buy, any security or product of Athene Holding Ltd. (“Athene”) or its subsidiaries.
- Certain of the information used in preparing this article was obtained from third parties or public sources. No representation or warranty, express or implied, is made or given by or on behalf of Athene or any other person as to the accuracy, completeness or fairness of such information, and no responsibility or liability is accepted for any such information.
- This article is not intended to be, nor should it be construed or used as, financial, legal, tax, insurance or investment advice.
- All information is as of the dates indicated herein.