How to Navigate Pension Risk Transfers, per 2 Experts

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.

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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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Tags: Dan Atkinson, George Sepsakos, Pension Risk Transfer

Endowments and foundations are too light on alternative investments, increasingly use outsourced CIOs and have cooled off a bit on environmental, social and governance issues, among the findings of a recent survey from CAPTRUST Financial Advisors.

According to a report of the CAPTRUST Endowments and Foundations Survey’s findings, alternative investments are an “untapped opportunity,” with 39% of respondents not currently allocating to the asset class. Among those organizations, liquidity concerns and complexity were the top two reasons given for not investing in alts, while 10% said they simply do not see any potential benefit.

The survey also found a steady rise in the number of organizations hiring an OCIO, reported by 33% of endowments and foundations, up from 28% in 2021 and 24% in 2020.

“We are seeing more organizations utilize a hybrid investment management approach, which enables an asset owner to delegate responsibility for all or part of their investment portfolio to a full-time investment advisor,” Grant Verhaeghe, endowment and foundation practice leader at CAPTRUST, said in a release. “Especially given the amount of market volatility in recent years, we expect more and more organizations to explore outsourcing their investment responsibilities.”

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However, the report also said most endowments and foundations continue to manage their investment assets either in-house or with the help of an investment consultant, despite the growth of discretionary management engagements.

Adoption of ESG investing fell slightly in 2022, continuing a multiyear trend among most asset classes, the research found. However, when the research is broken out by asset class, ESG-related investment adoption rates vary significantly. For example, the percentage of organizations adopting fixed-income ESG strategies plummeted to 49% in 2022 from 79% in 2020 and 65% in 2021, while domestic equity ESG adoption has only seen a modest decline of 6% in that time. Meanwhile alts are bucking this trend, with their ESG use surging 15 percentage points last year alone.

Not surprisingly, the report also found that “organizations that have not adopted ESG maintain a different worldview from those that have,” adding that these organizations believe ESG will detract from performance and are less likely to have discussed allocating to ESG in the past 12 months.

Additionally, the report found that approximately two-thirds of organizations surveyed prioritize diversity, equity and inclusion. Of these organizations, 82% said incorporating DEI practices is making their organizations more effective.

“This year’s survey data shows the vast majority of organizations are satisfied with their current level of DEI focus and believe DEI is increasing their effectiveness,” James Stenstrom, endowment and foundation director at CAPTRUST, said in a release. “Across the sector, DEI implementation is taking many forms, but boards are still struggling to find, attract, and recruit diverse members.”