Pension risk transfers are a trend that keeps building. But when corporate DB plans shift participants and the assets that back them to insurers, there are a lot of things to be wary of, as to help guide plan sponsors over this very challenging terrain.
The process of moving participants from corporate pensions to annuities can take up to a year and is festooned with many rules and demands, said Dan Atkinson, a consulting actuary and leader of PRT analysis at BCG Pension Risk Consultants, and George Sepsakos, a principal in the Groom Law Group on a panel during last week’s virtual DB Summit, hosted by CIO, PLANSPONSOR and PLANADVISER. The panel was moderated by Amy Resnick, executive editor of CIO and PLANSPONSOR magazines.
Finding the right insurer is a big task, which must be conducted within the framework of the Department of Labor’s Interpretive Bulletin 95-1, put in place after the collapse of insurer Executive Life, which issued annuities. Sponsors “can’t choose the cheapest one, but the safest available annuity,” Sepsakos said.
One big hurdle in a transfer: illiquid assets. Private equity has been a very popular asset class among sponsors, but “insurers aren’t eager to take them on,” Atkinson said. Selling PE stakes on the secondary market can be difficult, and sometimes private equity firms don’t allow the practice, he said. Cashing out would sometimes entail “accepting 50 cents on the dollar,” he observed.
Another task is searching for a plan’s missing participants, who are entitled to benefits, the two experts said. “If they died, you have to see if their survivors are eligible” for benefits, Atkinson said.
A transfer can be viewed by beneficiaries with trepidation. Sponsors must “reduce confusion” among participants by “meticulous communication,” Sepsakos said.
At times, participants are offered lump sums. “There can be suspicions among some, especially if they are no longer with the company,” Atkinson said. For sponsors, lump sums do have the advantage they do not have to be fully funded, as do annuity alternatives. “They just have to have enough assets to meet obligations” to lump sum recipients, he added.
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