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No discussion of pension-risk transfer (PRT) is complete without the obligatory mention of General Motors (GM) or Verizon. (If you have to ask why, you clearly don’t follow the pension industry closely—or at all.) And yet, since those two megadeals, the PRT space has been largely silent. Or has it?
Jason Richards, a consultant at Towers Watson who monitors PRT trends closely, thinks this silence is largely an illusion: “Among the broad universe, we tend to see more activity at the end of the year.” According to Towers Watson data, the first half of 2013 saw nearly $900 million in US annuity placement activity. “I would expect to see two to four times that in the second half of the year. It’s possible this trend will change in the future—but not in the next few years, probably. Most firms use 12/31 accounting, and they’re focused on managing the accounting impact,” Richards says.
“Another advantage to doing them at the end of the year is that you don’t have to re-measure,” he adds. “If a plan buys annuities on July 1, they have to re-measure all the plan obligations at that time and reflect that for the next six months. If you wait, you were always going to do a re-measurement at the end of the year, anyway.”
For jumbos—the term given to megadeals such as GM—the end-of-year trend is similar, if not a perfect mirror. “GM and Verizon likely transacted in the late part of 2012 for a reason,” Richards says. “To some extent, if a sponsor wants to get it done in a fiscal year, they watch the markets and see where it’s moving. If interest rates are rising, they tend to act that year; if they’re falling, they tend to wait.” But while the drivers are similar, the predictability may not be. “We expect these to be pretty sporadic,” he says.
They will also be slower than their smaller counterparts. “These big funds will be more likely to act as funded status improves,” Richards says. “But the time between decision and transaction—it’s a lot longer the bigger you are. If a $10 billion fund wants to buy annuities, there is at least a 12-month lag. They typically just can’t be as nimble.”
It may not be as newsworthy (nothing sells magazines like a behind-the-scenes look at a $29 billion deal, like aiCIO did in September 2012 with GM and Prudential), but smaller deals will be more predictable, quick, and numerous—which means that they, and not the jumbo deals, may be the staple PRT conversation piece in years to come.