Rising Funded Levels, PBGC Premiums Spur Pension Buyout Record

The US single-premium pension buyout market set a record with 501 contracts sold in 2019, according to the LIMRA Secure Retirement Institute, and sales are expected to increase again this year as the markets become increasingly volatile as a result of the coronavirus.

Some of the bigger buyout contracts in recent months include a $1.9 billion pension buyout contract purchased by defense and aerospace company Lockheed Martin from MetLife, and a $1 billion pension buyout contract purchased from Athene by manufacturing company Armstrong World Industries.

During the fourth quarter of 2019, buyout sales rose 6% compared with the fourth quarter of 2018 to $11.3 billion, marking the 20th straight quarter of sales exceeding $1 billion, and the highest quarter recorded since the fourth quarter of 2012. Total assets of buyout products increased to $153 billion, a 13% rise from the same quarter the previous year.

The increase in buyout contracts has been spurred by a combination of improved pension funded levels, increased market volatility, and rising Pension Benefit Guaranty Corporation (PBGC) premiums. The PGBC flat-rate premium per participant for single-employer pension plans has nearly doubled in just seven years to $83 in 2020 from $42 in 2013. And the rate of increase has been accelerating—the fee only rose by $4 between 2007 and 2012 but has surged by $48 since then.

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“We expect sales to continue to grow in 2020,” Mark Paracer, assistant research director of the LIMRA Secure Retirement Institute, said in a statement. “The rising operational costs and increased market volatility are favorable for pension risk transfer transactions as plan sponsors look for opportunities to de-risk their defined benefit plans.”

Meanwhile single-premium buy-in product sales had a record quarter in the fourth quarter at $970 million, the highest level recorded since LIMRA started tracking the sales. For the year, there were six single premium buy-in sales, totaling $1.9 billion, which was twice the annual sales record set in 2018.

“The pension buy-in market is a small but growing market,” Paracer said. “While there have been only 20 buy-in contracts issued in the US, five of the past six quarters have had at least one buy-in contract sold.”

Both buyout and buy-in deals involve purchasing a group annuity contract, however with a buyout deal, the insurance company takes over for paying the participants directly, while with a buy-in deal, the plan sponsor remains responsible for making benefit payments but is reimbursed by the insurance company.

Total group annuity risk transfer sales in the fourth quarter 2019 were $12.4 billion, 7% higher than during the same period in 2018, and were $30.5 billion for the year, up 8% from 2018.

Limiting vs. Eliminating Pension Risks

Volatile Markets Are Spurring Defined Benefit Plan De-Risking

Tags: Annuity, Athene, buy-in, buyout, De-Risking, LIMRA Secure Retirement Institute, MetLife, PBGC, Pension, risk transfer

Extreme weather events are happening more frequently, according to the five-year moving average of the Actuaries Climate Index (ACI), which hit a new high for the sixth straight quarter.

The Actuaries Climate Index is an index of climate risks akin to the consumer price index, but instead of monitoring average price changes over time to a basket of standard goods and services, the ACI measures climate risks based on a basket of six extreme climate components.

The ACI is sponsored by the American Academy of Actuaries, the Canadian Institute of Actuaries, the Casualty Actuarial Society, and the Society of Actuaries. It is designed to provide actuaries, public policymakers, and the general public with objective data about changes in the frequency of extreme climate events over recent decades.

The sponsors of the index say it’s a useful tool for actuaries because climate change is having a financial impact on insurance consumers and the insurance industry, and because actuaries are experienced in assessing and mitigating the financial consequences of risks.

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The components of the index include the frequency and duration of extreme high and low temperatures, heavy precipitation, drought, strong wind, and sea level changes. The index is available for 12 regions in the United States and Canada and examines how the six components and their composites are changing over time by region and across the two countries.

The index defines extreme high temperatures as the frequency of daily temperatures above the 90th percentile, while extreme low temperatures are defined as the frequency of daily temperatures below the 10th percentile. Heavy rain is measured by a maximum five-day rainfall in the month or season, while drought is measured by a maximum number of consecutive dry days per year, which is defined as daily precipitation of less than one millimeter.

High wind events are measured by the frequency of daily mean wind speeds above the 90th percentile, as measured by wind power, which has been shown to be proportional to wind damages. And sea level measurements are taken on a monthly basis via tide gauges located at 76 stations with reliable time series. The tide gauges measure sea levels relative to the land below, but since the land is moving in many places, the component measures the combined effect on coastal shorelines of land movements and sea level changes.

The ACI’s moving average smooths out monthly and seasonal fluctuations for a measurement of long-term climate trends. Increasing values in the index indicate increased occurrences of extreme climate events.

The index is expressed in units of standard deviations from the mean for a reference period that spans from 1961 to 1990. After reaching a value of 1.18 standard deviations in spring 2019—which was revised upward because of data updates from a preliminary reading of 1.16 above the index’s historical reference period—the index’s five-year moving average topped out at 1.20 as of summer 2019, which is when the most recent measurements were available.