The US pension risk transfer (PRT) market saw a record-breaking first half of 2023 with deals worth $22.5bn recorded, according to data from Legal & General Retirement America (LGRA), but full year numbers are likely to be lower than the all-time high recorded in 2022.
Despite a number of deals taking place in the third quarter, including a plan termination by aerospace firm AAR Corp, and partial buy-outs by Owens Corning and ATI Inc, there were none on the scale of the record breaking $16bn PRT conducted by IBM during the same period 12 months earlier.
LGRA’s November PRT Monitor said that a total of $10bn worth of deals were struck in the third quarter of 2023 and it estimated that full year volumes would be about $45bn, below the record $51.9bn seen in 2022.
According to Jake Pringle, Houston-based Principal and Consulting Actuary at Milliman, there was no slackening of demand in the US PRT sector in the second half and that instead the busy first half meant some insurers reached their capacity limits as the year progressed.
“Because the second quarter of 2023 was so busy we started to see insurers reach capacity by the end of the year because a lot of carriers were probably ahead of schedule on the amount of business they wanted to write.
In the third and fourth quarters, insurers started to be more selective and say: ‘We’d like to bid on this one but we’re at capacity and don’t have the ability to onboard this particular plan’”, Pringle says.
Pringle says that despite these capacity constraints the sheer competitiveness of the US PRT market meant pricing remained competitive in the second half of 2023.
“With all the entrants that have come into the market over the last five years we know going into a PRT transaction, there will be a number of insurers which meet the plan sponsor’s criteria.
But even in those cases, where we were seeing fewer insurers, it was still possible to get competitive pricing on PRT projects,” says Pringle.
Sheena McEwen, Head of Distribution at LGRA, agreed with Pringle that US PRT deals are priced at a competitive level and she says that more entrants to the market are likely.
“PRT transactions are priced very attractively. Often, sponsors can get pricing which is very close to the values that they’re holding on their balance sheets, and they may not even need to make additional contributions to complete a deal.
“There’s now over 20 insurers active in the US PRT sector, which is a lot. And I expect more to come on to the market. Exactly how many and when is unclear but the flow of new entrants is likely to continue,” says McEwen.
The numbers and names of insurers active in the US PRT sector may evolve in the near term but it is almost certain to remain focused on partial, or full, buy-outs.
According to Milliman’s November Global PRT Market Outlook, 93% of US transactions in 2022 by premium value were some form of buy-out.
And while US insurer Prudential Financial took the largest chunk of a $14.2bn longevity risk transfer from Dutch financial services firm NN Group in December, McEwen doesn’t expect to see a similar market emerge in the US itself.
“The US is unlikely to see the widespread uptake of alternative forms of PRT such as longevity swaps. There is a different dynamic in the market in terms of the risks that plan sponsors are looking to manage versus, say, the UK,” she says.
The main reason for the US PRT market’s buy-out focus is that other forms of risk transfer won’t reduce a plan sponsor’s Pension Benefit Guaranty Corporation (PBGC) premiums.
In 2024 these are set to increase again to $101 per head, more than double the 2014 figure of $49.
“PBGC premiums will continue to be a major driver of the US PRT market. If a sponsor completes a full buy-out it means it no longer has to pay these premiums, as well as removing a source of volatility from its balance sheet.
A longevity swap, for example, would not bring relief from making these statutory contributions,” McEwen says.
Another reason is that US pensions are not typically indexed to inflation, with Milliman’s Pringle estimating that only about 25% of private sector schemes contain this benefit.
This contrasts with pension schemes in the UK and the Netherlands, which are typically indexed to inflation, making longevity risk transfers more attractive to European plan sponsors.
“Because UK annuities are indexed it means there is a lot more tail risk from people living longer than in the US, which is potentially why there’s more value in having a market for longevity swaps in the UK and other regions.
That means when a plan sponsor is doing a cost benefit analysis of a PRT transaction in the US, it can be much more compelling to conduct a full buyout than any other kind of partial de-risking products like longevity swaps,” says McEwen.
Longevity swaps may be off the menu but McEwen is confident that the US PRT market will continue to see a robust level of activity this year.
“It doesn’t look like the US PRT market will slow down in 2024. There’s over $3trn in private sector DB assets out there. And only one or two per cent of it gets annuitized with insurers on an annual basis.
“There’s potential for significant annual market growth, it’s very difficult to predict exactly how that’s going to look, even just for next year, but there’s no sign that it’s going to slow down. I can certainly say that with a high level of confidence,” says McEwen.
Milliman’s Pringle agrees, saying that despite the slight dip in US interest rates in December macro factors will continue to boost plan sponsor’s appetite for PRT deals.
“There are a lot of plans in our pipeline that are looking to do a transaction at some point in 2024,” he says.
Volatility in the UK government bond (gilt) market in October 2022 resulted in an increased interest in PRT from funds with an LDI strategy in 2023, but Pringle says the US market is different.
“For plans which have executed an LDI strategy, movements in interest rates will have a minimal impact on their decision to complete a pension risk transfer. But plans which don’t have an LDI strategy in place will need to be more opportunistic in terms of how their assets are moving in relation to interest rates,” he added.
Pringle says that however interest rates move over the next 12 months, the continuing level of demand from plan sponsors for PRT deals and the capacity restraints experienced by some insurers in the second half of 2023 means there is room for more firms to enter the market.
“What was interesting to me was just how quickly some of the insurers reached capacity in 2023. I’ll be curious to see if that happens again in 2024.
“There was certainly room for more players in 2023, and if an insurer is on the cusp of being able to enter the market there are plenty of opportunities for them to win some business.”