As a result of poor stock market returns over the last few weeks, pension funding has taken a hit, posing challenges for plan sponsors and asset allocators looking to de-risk and potentially conduct a pension risk transfer.
According to October Three Consulting, President Donald Trump’s initial tariff announcement triggered a sharp decline in interest rates used for pricing annuities at the start of the month, making annuities more expensive, but the subsequent 90-day pause in the largest tariffs has driven a notable rebound.
The shift presents a “critical window of opportunity” for plan sponsors to strategically carve out some, or all, of their retirees in a PRT, according to October Three.
Mark Unhoch, A partner in October Three Consulting, says depending on what corporate pension plans were invested in, and if they were following a liability-driven investing strategy, they may have fared better than others over the last few weeks. By matching assets and liabilities, LDI strategies aim to reduce the volatility of funded status and protect against risks like interest rate fluctuations.
“[Pension plans] saw a double whammy at the beginning [of the month], where interest rates and the market dropped,” Unhoch says. “But interest rates have come back to where they were before the drop…”
On the 10-year Treasury note, interest rates are around 4%. Unhoch says while insurance companies do not use the Treasury as a credit rate, it is a good gage of where their rates are.
October Three found that annuity purchase interest rates saw a modest increase in March. Since last month, the average duration 7-year annuity purchase interest rate rose six basis points, and the average duration 15-year annuity purchase rate rose 17 basis points.
Unhoch says after canvasing insurance companies, October Three found that plan sponsors paused over the past month when it comes to conducting PRTs and are waiting to see what is happening with the markets before looking to transact. But because of the interest rate turnaround, Unhoch says he has some clients who are now looking to transact as soon as possible.
“The insurance companies are kind of light right now, because people have taken a pause, so it is a good time to transact if you can act quickly,” Unhoch says. “If you are fully funded or even over funded, this may be a good time to say, ‘I need to immunize my portfolio and my liability,’ and then turn into somewhat of an LDI strategy.”
LIMRA recently reported that total U.S. single-premium PRT sales hit $51.8 billion in 2024, a 14% increase from the prior year’s results. Unhoch notes that the first quarter of 2025 appeared to be relatively normal for PRTs, with about $5.5 billion in total sales.
Meanwhile, underfunded plans are likely facing challenges due to the recent market downturn, and they may face increased required contributions in the years ahead. Given the recent funding losses, October Three argued that it is important for plan sponsors to evaluate the available opportunities and strategies to mitigate risk for the plans.
The first step for sponsors would be to consult with an annuity broker to assess and discuss the evolving market conditions and determine what makes most sense for the plan, according to October Three.
Interpretive Bulletin 95-1, issued by the Department of Labor, outlines the formal fiduciary responsibilities under the Employee Retirement Income Security Act that a plan sponsors must follow when selecting an annuity provider for a defined benefit plan. Rather than focusing solely on price and insurance ratings, fiduciaries are required to prioritize the best interests and safety of plan participants when selecting an annuity provider.
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Tags: Interest Rates, Mark Unhoch, market volatility, October Three Consulting, pension funding
