Economic Concerns Likely to Spur Pension Risk Transfers

Inflation, market volatility, rising interest rates, and geopolitics are potentially accelerating the pension risk transfer market, according to a report from MetLife.

MetLife’s Pension Risk Transfer Poll, which heard from 251 defined benefit plan sponsors who have de-risking goals and $100 million or more in plan assets, found that 95% say higher inflation is “very or somewhat impactful” on their decision to move forward with a pension risk transfer. And 92% of sponsors say rising rates are making it more likely they will decide to de-risk their plans.

“The economic landscape has shifted significantly since our last poll and this change has led DB plan sponsors to take a closer look at their plans and pension risk transfer options,” Elizabeth Walsh, MetLife’s head of pension solutions, said in a statement. “Not only is inflation a factor, but other considerations, such as market volatility and rising interest rates, can potentially impact the decision to move forward with PRT.”

According to the survey, macroeconomic concerns are motivating plan sponsors to maintain or even accelerate their plans for a pension risk transfer. These include the geopolitical environment (96%), market volatility (94%), rising interest rates (91%), COVID-19 (91%), and inflation (86%).

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“2022 is shaping up to be another record year for the PRT market and we don’t anticipate activity will slow down for the foreseeable future,” Walsh said. “It is clear from our poll’s findings that pension de-risking is top of mind for many DB plan sponsors”

According to the LIMRA Secure Retirement Institute, 2021 was a record year for the pension risk transfer industry with $38 billion in sales, and plan sponsors expect this to continue in the coming years. The MetLife poll found that 64% of plan sponsors predict the volume of large de-risking transactions will increase in the next five years, while 18% believe the amount will remain the same.

“We expect that prediction to come true, considering that nearly nine in 10 plan sponsors (89%) say they are likely to consider a PRT option from an insurance company in the next five years,” said the report.

MetLife said that as concerns of an impending recession grow, executives are increasingly scrutinizing their company’s financial performance and taking a more active role in managing their defined benefit plans. The poll found that 93% of plan sponsors said their pension receives significant attention from corporate management because of the financial effects on their balance sheet. And 95% said their company routinely weighs their defined benefit plan’s value against the cost of the benefits.

As for the type of pension risk transfer activity plan sponsors will most likely use, 57% said an annuity buyout, which includes 28% who say they plan to use a combination of an annuity buyout and a lump sum. That is up from two years ago, when 34% of plan sponsors said they would use a buyout only or in combination with a lump sum. Among those seeking an annuity buyout, 62% said they will secure a buyout for a retiree lift-out, while only 21% said they will secure a buyout for a plan termination. The remaining 17% said they don’t yet know their approach.

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Tags: De-Risking, Elizabeth Walsh, Geopolitics, Inflation, LIMRA Secure Retirement Institute, market volatility, MetLife, Pension Risk Transfer, poll, PRT, rising interest rates, Survey

Major banks’ profit reports out Friday morning don’t suggest a very robust earnings season for the quarter that ended September 30.

For the third quarter, analysts are forecasting a mere 2.4% earnings growth on average for the S&P 500, according to FactSet data. That’s quite a comedown from the estimate last June for the September-ending period, which was 9.9%. This year’s first quarter clocked a 9.2% increase, and the second was 6.2%.

Banks and financial services in general aren’t expected to book a good third quarter, as loans volume is expected to drop, along with fees for lucrative activities such an investment banking and securities underwriting. Another minus: Banks are beefing up their reserves, in anticipation of an economic downturn, and this acts to sap results. Analysts’ estimates of their performance are lower this quarter than before, meaning they have a lower bar to vault.

The Friday morning spate of bank results were a mixed bag, and hardly the solid performance investors had been used to. Citigroup beat earnings estimates but missed projections for revenue, per Bloomberg. Morgan Stanley missed on both earnings and revenue, while Wells Fargo beat on earnings but came up short on revenue.

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JPMorgan Chase, the largest bank company by assets, topped analysts’ estimates on both scores. Earnings were $3.12 a share, besting the $2.88 estimate. But these are nothing special, compared with JPM’s year-earlier profit, which was 17% higher.

In early trading, the S&P 500, which lately has enjoyed a respite rally from its continued tumble, greeted the bank results by rising a tiny 0.06%. Three of the four major banks saw their stock move up 1% to 3%, perhaps in relief that the results weren’t a wipe-out.

Morgan Stanley’s shares slipped 3.5%, likely due to its significant earnings decline, 30% below the year-earlier period. The company was hurt by a painful dip in fees from investment banking, its specialty. Morgan Stanley lacks the large consumer banking presence of the other three. In particular, consumers have continued to spend, and the other banks’ credit cards are doing fine for now. JPM’s card revenue was up 13%; Morgan Stanley does not offer cards.

This is just the start of the third quarter earnings season, and Wall Street is anxiously watching what will come next. FedEx is among the many companies that have furnished downbeat guidance about the quarter, ahead of issuing their actual reports. Automakers, real estate, and cruise lines are among those where the profit announcements aren’t anticipated to be buoyant.

The earnings results won’t all stink, of course. Consumer goods appear to be able to pass along inflation, as most of their products aren’t that expensive to begin with. That appears to be the case for PepsiCo, maker of soda and snacks, which said this week that profits had expanded a robust 20% for the quarter.

An underwhelming earnings season is no cause for rejoicing among pension plans, as the profits news will do little to raise the stock market. Equities make up 47% of public plans assets, the biggest allocation by far. This year’s bear market has impelled a number of CIOs to think about keeping so much in the stock market.

The stock market has been ailing all year long, with the S&P 500 down 23%. Small wonder that asset allocators are eyeing diversifying away from a strong emphasis on stocks. The California Public Employees’ Retirement System lost 6.1% for the fiscal year ending June 30, and put much of the blame on its public stock holdings, which, at around half the fund’s portfolio, are its largest asset class. CalPERS CIO Nicole Musicco has discussed moving more money into alternatives such as private equity, whose performance has been good.