The US pension risk transfer (PRT) market saw its biggest year in 2022, with AON recording a total of 568 transactions, worth $52bn — a 28% rise on the previous year and a record for the sector. This heightened level of activity has continued into 2023 with Legal & General Retirement America’s (LGRA) Q1 2023 PRT Monitor reporting around $6bn worth of deals in the first three months of 2023, ahead of the $5.3bn recorded a year earlier. LGRA said it was likely the first half of 2023 would see a record $23bn worth of transactions.
Big name US corporates struck PRT deals in 2022, including IBM offloading $16bn worth of pension risk to a pair of insurers, and aerospace firm Lockheed Martin making a $4bn group annuity purchase. A significant transaction so far this year was the $8.1bn PRT deal between telecoms groups AT&T, and private equity-backed insurer Athene, which was announced in April and will see 96,000 retirees change pension provider. The driver for this activity is, of course, rising interest rates: the US Federal Reserve increased its base rate by 425 basis points (bps) over 2022, with another 50bps added each in February and March this year, widening the discount rate used to estimate the net present value of pension scheme funding levels.
“What makes the total premium more impressive is that the significant increase in interest rates reduced the size of plan liabilities, effectively making the premium for individual PRT deals smaller,” AON said in its March report on the Q1 US PRT market.
According to research from actuarial consultants Milliman, the funding status for the 100 largest US private pension schemes increased on average by 12% from fiscal year 2020 to fiscal year 2023.
Jake Pringle, Principle and Consulting Actuary at the firm’s pensions arm, says as a result his team are increasingly focussed on PRT deals.
“From our standpoint, 2022 was certainly busier than 2021, and the pipeline for 2023 is as full as it’s ever been, with lots of deals lined up over the next three months. It can be challenging to ensure that things don’t get overscheduled in terms of setting up the calls, performing the financial due diligence and all the other aspects involved in completing a PRT transaction,” he said
According to the Houston-based actuary, the Fed’s interest rate hikes in early 2023 have been a key factor in sustaining PRT demand.
“As interest rates started to rise it felt like plan sponsors were thinking: ‘Maybe this is a limited time opportunity, and these rates are going to come down once inflation gets under control’. Then in 2023, it became clear that high inflation and interest rates are not short-term events and pension plans became more comfortable looking at a PRT.”
Rising interest rates may be the catalyst for the current spurt of US PRT activity but the long-term increase in Pension Benefit Guaranty Corporation (PBGC) — the US pensions lifeboat — premiums has been a secular driver of demand over the last decade.
In 2013 the PBGC charged a flat rate of $42 per plan member. In 2023 this had increased to $96 a head, meaning AT&T has saved a significant amount in PBGC premiums by offloading its retiree obligations this year.
“PBGC premiums have always been a bit burdensome in the US because even a fully funded plan has to pay the flat rate per participant and they have been going up at a steady rate over the last decade, so it’s not a minor expense. And for pension plans which are underfunded, a lot of times the plan sponsors are saying: ‘If I’m going to be paying money, I want it to go into the plan’. But if they conduct a PRT transaction it may cost a bit upfront but it’s possible to get a fair portion of that back via PBGC premium savings over the next five to seven years,” Mr Pringle says.
In April the UK’s Pension Regulator warned in its annual funding statement that the domestic buy-out market had limited capacity and schemes could find themselves struggling to secure a provider and end up paying higher premiums.
The picture in the US is different, according to AON’s 2022 PRT market report, which said demand remained robust among insurers for taking on pension scheme risk. Last year saw three new entrants entering the US direct writing sector, including Reinsurance Group of America, Global Atlantic and American National, meaning there are now 22 firms active.
Despite this increase, Mr Pringle says that the sheer level of demand from plans means that the number of rejections from insurers is rising, and there has been a slight fall-off in the number of carriers bidding on a PRT transaction. However, he says that this shortage is muted.
“It’s not like we had to implore insurers to do a PRT deal, or that there is only one bid on a placement so we had to follow up to get a second bid so there is a competitive situation. It’s more a case of one or two less firms bidding than we would have previously expected once they start to hit capacity.”
The first quarter numbers are notable given that the US PRT market activity is typically heavily skewed to the second half of the year, particularly the final quarter. Mr Pringle says that US pension schemes receive their evaluation results around August, or September, meaning corporates can estimate their next year pension fund cash contributions and are able to take a decision on whether to de-risk at this point.
Add the January 1 deadline for PBGC contributions to the mix and the result is typically a year-end scramble in the US PRT market. But Mr Pringle says that given the elevated level of activity so far in 2023 the sector could face capacity challenges in the final quarter.
“Insurance companies have a goal in mind in terms of how much business they want to write this year and that could be $500m, or $10bn, depending on the size of the firm. My estimate is that with the level of activity we have seen in 2023 so far, most insurance companies are probably ahead of schedule on that metric.”
