Rising Funded Levels, PBGC Premiums Spur Pension Buyout Record

The US single-premium pension buyout market set a record with 501 contracts sold in 2019, according to the LIMRA Secure Retirement Institute, and sales are expected to increase again this year as the markets become increasingly volatile as a result of the coronavirus.

Some of the bigger buyout contracts in recent months include a $1.9 billion pension buyout contract purchased by defense and aerospace company Lockheed Martin from MetLife, and a $1 billion pension buyout contract purchased from Athene by manufacturing company Armstrong World Industries.

During the fourth quarter of 2019, buyout sales rose 6% compared with the fourth quarter of 2018 to $11.3 billion, marking the 20th straight quarter of sales exceeding $1 billion, and the highest quarter recorded since the fourth quarter of 2012. Total assets of buyout products increased to $153 billion, a 13% rise from the same quarter the previous year.

The increase in buyout contracts has been spurred by a combination of improved pension funded levels, increased market volatility, and rising Pension Benefit Guaranty Corporation (PBGC) premiums. The PGBC flat-rate premium per participant for single-employer pension plans has nearly doubled in just seven years to $83 in 2020 from $42 in 2013. And the rate of increase has been accelerating—the fee only rose by $4 between 2007 and 2012 but has surged by $48 since then.

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“We expect sales to continue to grow in 2020,” Mark Paracer, assistant research director of the LIMRA Secure Retirement Institute, said in a statement. “The rising operational costs and increased market volatility are favorable for pension risk transfer transactions as plan sponsors look for opportunities to de-risk their defined benefit plans.”

Meanwhile single-premium buy-in product sales had a record quarter in the fourth quarter at $970 million, the highest level recorded since LIMRA started tracking the sales. For the year, there were six single premium buy-in sales, totaling $1.9 billion, which was twice the annual sales record set in 2018.

“The pension buy-in market is a small but growing market,” Paracer said. “While there have been only 20 buy-in contracts issued in the US, five of the past six quarters have had at least one buy-in contract sold.”

Both buyout and buy-in deals involve purchasing a group annuity contract, however with a buyout deal, the insurance company takes over for paying the participants directly, while with a buy-in deal, the plan sponsor remains responsible for making benefit payments but is reimbursed by the insurance company.

Total group annuity risk transfer sales in the fourth quarter 2019 were $12.4 billion, 7% higher than during the same period in 2018, and were $30.5 billion for the year, up 8% from 2018.