The US pension risk transfer market got off to a slow start last year, with total PRT sales down 48% year over year compared to the third quarter of 2024.
But the fourth quarter is expected to make up for it; Aon’s U.S. Pension Risk Transfer (PRT): Annual Report Preview said that “After a quiet start to the PRT market in 2025, the fourth quarter was exceptionally busy. There will be more premium settled in the fourth quarter than in the first three quarters combined. We expect $45 billion to $50 billion in premium in 2025, subject to final insurer sales reporting.”
Clearly, then, demand is there from plan sponsors to de-risk. And arguably, there should be: The generally strong funding levels of US corporate defined benefit pension plans – primarily driven by the sustained environment of higher interest rates, which has significantly reduced the present value of future pension liabilities – means that purchasing a group annuity contract is more affordable than ever.
But less than a third of them plan to do so. That’s according to Aon’s 2025 Global Pension Risk Survey – U.S. Findings, which says that 68% of respondents “report a long-term objective other than plan termination.”
There is a good argument here, too. Maintaining a run-on strategy allows US plan sponsors to treat a well-funded pension as a strategic financial asset rather than just a liability to be offloaded; the ability to utilise surplus assets to fund other corporate objectives, such as funding DC Plans, offsetting costs for life or health insurance via Section 420 transfers and avoiding the high “exit premium” and excise taxes (often up to 50%) associated with a full plan termination and reversion all count here.
So, what will be the impact on the PRT market of all these plans electing to run-on?
Negligible, according to Eric Friedman, Partner and Director of Content Development at Aon Investments USA.
“The pension risk transfer market includes both full plan terminations and partial settlements where the plans annuitize a portion of the population, so plan terminations are not the only source of activity in the market. The aggregate premium has been in the $45-52bn range from 2022-2024, and we expect the final figures for 2025 to come in near this range too. It is hard to predict the future for these figures, especially over a 1-year horizon, but our baseline expectation for the foreseeable future is that PRT activity will stay around the recent levels,” he said.
Plenty more premium out there that will need to find an insurance home in the coming years, then. But a significant portion of those schemes looking to terminate – 56% – say they must conduct a major data cleanup effort, from mortality coding to beneficiary records, before they can proceed. Data issues can inflate annuity pricing, delay deals or create a PBGC audit surprise, but this is unlikely to have much of a short-term impact on the market.
Additionally, approximately two-thirds of respondents have not changed their investment policies, despite the higher interest rate environment now compared to, say, five years ago.
“Most of the terminating plans are not terminating for several years, so they may be waiting until the event gets closer to do the data cleanup,” said Friedman.
“And as for the investment strategy, at the end of January this year, the 10-year UST was yielding 4.26% and Bloomberg Long Credit was yielding 5.68%. At the end of December 2021, the 10-year UST was yielding 1.51% and Bloomberg Long Credit was yielding 3.10%. So, yields are still much higher today than they were a few years ago. It’s not too late to change.”
For the 32% of US DB plan sponsors that are looking for a termination solution, only 15% expect this to happen in two years or less. That is plenty of schemes, however – the US market is large, after all – and over half expect it to happen in six years or longer.
Getting their data in order is one thing, but re-evaluating, and changing, their investment approach is another. But, even for schemes looking to terminate, Aon’s report says that they could do worse than look at hiring an Outsourced Chief Investment Officer (OCIO) to help them in their ‘last mile’ journey.
OCIOs, while typically hired by institutional investors to run a medium-long term investment programme, have asset management capabilities that can support plan terminations, even if it may appear counterintuitive on the surface to hire one for what will be only a short-term assignment.
The home stretch of a pension plan termination is often the most complicated – including the aforementioned data cleanup – and many plan sponsors are looking for an OCIO experienced in these situations to help them navigate the process.
Indeed, 40% of all survey respondents have already delegated responsibility for their entire investment strategy, regardless of whether they plan to terminate, and there is one particular area where investment expertise makes a difference.
Most plans being terminated run a ‘lump sum’ window, which warehouses cash for plan members who want to take a one-time cash payment to leave the plan forever (as opposed to receiving a monthly payment for the rest of their lives).
The cost of the lump sums is usually lower than the cost of purchasing annuities from an insurance provider and during the window, the interest rate for the lump sums is frozen for a “stability period” prior to the payments so it does not change after the participants decide whether to take a lump sum.
This changes the liability’s sensitivity to interest rates and the take-rate for lump sums is also uncertain, though good guesses can be made based on historical data on take-rates from lump sum windows run by other plans.
But after the lump sums are paid, the liability itself is smaller and has a different duration.
“This means it is critical to closely monitor the liability duration and take-rate as the lump sum window progresses, adjusting the plan’s duration and liquidity as needed to minimize unintended risks. No-one wants to tell their board the plan can be wound down for a certain additional contribution, and then a few months later, the number turns out to be twice that or more,” said Friedman.
Examples like this one mean that, for Friedman, there is likely to be plenty of OCIO hiring to support that $50bn or so of annual US PRT premium in the coming years.
“It will happen as plan sponsors increasingly find the benefits and costs of this approach attractive,” he said.
“OCIO mandates will allow for more tailored investment strategies and more favorable financial outcomes for terminating plan sponsors.”
