When all is said and done, 2024 could end up delivering aggregate premium at or close to the US pension risk transfer (PRT) market’s current banner year of 2022, where $51.9bn worth of deals was written in the space.
That is according to the November 2024 edition of Legal and General Retirement America (LGRA)’s Pension– Risk Transfer Monitor, a quarterly report the firm publishes that tracks activity in the market. A total of $14bn of deals were completed in the third quarter of this year alone, with IBM’s $6bn deal with Prudential a notable transaction.
On both sides of the Atlantic, the media coverage of the space tends to relate to the aggregate size of the market in dollars or sterling, but it isn’t a case of a handful mega deals exaggerating the size of the market; indeed, there is plenty of activity across all scheme sizes to keep pension scheme and insurance actuaries busy.
“In 2023, around 800 PRT contracts were signed,” said George Palms, President at LGRA.
“And this year, there has also been an upward trend in PRT transactions between $500 and $999m. From what we have seen, the total amount of premium in the $500m-$1bn space is around $9bn in total, compared to $6bn in 2023. There has been plenty of growth in the middle-to-large market in the US this year.”
When interest rates began to rise two years or so ago, there was talk in the UK that some smaller schemes might get crowded out of the market due to the bigger deals taking precedence. In terms of human capital, the ratio of effort expended to deal size to complete a smaller transaction is higher than it is for a larger deal, but that concern has not materialised.
The smaller end of the market is similarly healthy stateside, albeit, for different reasons.
“It is important to point out that in the US, there are around 20 insurers in the market, and they all have different appetites for deals in different segments. You may see a deal where the total value is below $100m and you will have over eight bidders on that transaction. That’s not uncommon,” said Palms.
Success in the PRT market relies heavily on accurate mortality modelling, and the US market has seen positive developments in this area that are supporting the recent growth.
“We’ve noticed a growing sophistication in mortality modeling in the US PRT market, with the majority of insurers now using multi-factor models in their baseline assumptions to capture the predictive power of factors such as ZIP+4, collar type, benefit amount and gender. Insurers are now commonly using multiple factors simultaneously to capture differences in mortality rates at the individual member level, and those not using such models run the risk of adverse selection,” said Erik Pickett, Actuary and Chief Content Officer at Club Vita.
“We’ve also seen a growing focus on mortality improvement assumptions as insurers face the uncertainty of the long-term impact of the Covid-19 pandemic. This is the area of greatest divergence in mortality assumption setting, although there does seem to be an increasing consensus to reflect higher expected mortality improvements in the defined benefit pensioner population over the general population,” he added.
Additionally, Pickett observed that, similar to the UK market, there is a strong focus on data quality stateside.
“With a greater dependency on data to set mortality assumptions, the value of complete clean data from pension plans looking to transact is high. When this is unavailable it is common for insurers to add extra margin to deals to cover the uncertainty introduced,” he said.
A big news story this year in the US market was the Department of Labor’s report to Congress published in June reviewing the Employee Benefits Security Administration’s Interpretive Bulletin 95-1 (IB95-1).
IB95-1 was originally written in 1995, and essentially determines the type of transactions completed in the market – full scheme buy-outs, as opposed to the more common buy-in transactions seen in the UK market, due to the ‘safest annuity available’ clause in the regulation.
“Buy-ins are more difficult to complete in the US because of the safest available annuity clause in IB95-1. An insurer may be the safest available at inception, but then in two or three years, they may not be any longer,” said Palms.
“But there are maybe a dozen buy-ins a year, although they are used in specialised situations like a plan termination. They are used to lock in the cost of the transaction to the plan sponsor up front and then the move from buy-in to buy-out happens in less than a year when consummating the termination of the plan.”
Those plan sponsors that are looking to do a deal had better act fast. Americans are famous – infamous? – for working long hours, and Palms said that there could well be a deal completed between Christmas and New Year last year, when most Europeans would have been…not working. Additionally, in the US, their financial and tax year ends on December 31st, so there is plenty of activity during the festive period to close out the year-end as strongly as possible.
But the first quarter of the calendar year tends to be less busy, and benefits are on offer for those ready to begin the process earlier in the year.
“Historically in the US, one piece of advice I would have to a plan sponsor is if you have a transaction, bring it in Q1. Volume is typically lower in Q1, but insurers are eager to start writing business. It’s a good time to transact, with a lot of participation. Schemes can get a more favourable PRT premium than they can in the fourth quarter, when things are much busier. Insurers may become more selective which can lead to fewer bidders in the fourth quarter.”
Whether plan sponsors come to market in the first quarter of 2025, or the fourth quarter, will not make much of a difference to the macro picture, however, which is robust, to say the least – and should stay that way.
Consultants Milliman publish the Milliman 100 Pension Funding Index, which shows the firm’s view of the funded status of the 100 largest corporate defined benefit pension plans in the US. The November 2024 edition suggests that the funded ratio jumped to 103.4%, from 102.5% at the end of September, and the funded status surplus increased to $43bn.
While the Milliman Index has only been in surplus in recent years, schemes tend to lock in their funded status via hedging tools. Add to that the sheer size of the market in the US – the runway is long – very long – and the market should continue to hit new highs in the coming years.
“In the United States, there are more than $3trn in defined benefit pension liabilities and only about 10% of that has been de-risked so far. The steady march up in terms of taking liabilities off balance sheets will continue due to secular trends around de-risking and strong funding levels,” said Palms.
“In the next five years, I’d expect the market to eclipse the current high of $51.9bn and I wouldn’t be surprised if the new high-water mark will be $100bn. The market will step up to a new level.”
