Canadian Investment Review

U.S. DB plans looking to de-risk over next decade

Written by Yaelle Gang on Wednesday, January 30th, 2019 at 2:41 pm

Woman is using tablet pc, pressing on virtual screen and selecting annuity © wrightstudio /123RF Stock PhotosWhile 2018 was a strong year for de-risking among U.S. defined benefit plans sponsors, a significant portion of the more than $3 trillion in DB plan liabilities that have yet to be de-risked are expected to go through the risk transfer pipeline over the next 10 years, according to MetLife’s 2019 pension risk transfer poll.

The poll found 76 per cent of DB plan sponsors with de-risking goals said they plan to completely divest all of their plan liabilities at some point in the future.

The high numbers are likely due to increasing education and awareness, says Wayne Daniel, senior vice-president and head of U.S. pensions at MetLife. “Plan sponsors are increasingly aware of the financial volatility, the financial cost, the regulatory implications, the reporting complications, the responsibilities of continuing to manage a plan,” he says, noting plan sponsors may want to focus on their core underlying business activities and hand over responsibility for pensions.

There various ways a plan can de-risk include purchasing a buyout annuity or transferring a lump sum payment to participants that haven’t started collecting payments.

The survey asked plan sponsors what kind of risk transfer activity they’re most likely to use. It found 67 per cent are considering a buyout annuity, which included 50 per cent who said they’d use a buyout annuity combined with a lump-sum payment.

Among survey respondents that reported they’re likely to make a risk transfer to an insurer within two years, many said they’ve already taken steps to start preparing for a buyout. This included evaluating the financial impact of a pension risk transfer, holding discussions with key stakeholders, engaging in a data review and cleanup, exploring solutions in the marketplace and quantifying the costs of a pension risk transfer.

Daniel’s advice to plan sponsors looking to de-risk in the coming years is to “start preparing last week.”

This may include preparing data, looking at governance and preparing investments, he explains. “There’s a lot of work to do on the data side, there’s a lot of work to do on the governance side, there’s a lot of work to do on the investments side. And then simultaneous with all of those pieces, we advise clients to engage with an experienced consultant who may be their existing pension advisor or perhaps a supplement to their existing pension advisor — someone who has experience with pension risk transfer and can take them through the process — because it is quite a complex project that has to be closely managed.”

 

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