Sales of pension risk buy-out products topped $3.8 billion in 2013, according to a LIMRA Secure Retirement Institute survey. This represents the best sales year for these products since 1999 with the exception of 2012 when General Motors and Verizon transferred their group pension obligations to Prudential, causing sales to spike to $35.9 billion for the year.
Sales in 2012 are seen as an anomaly because those two large companies were responsible for nearly all the sales that year. In a year-to-year comparison, 2013 sales represent a decrease of 88 percent. If you exclude the GM and Verizon deals, however sales in 2013 increased compared to 2012.
An improved interest rate environment in 2013 enabled more companies to make gains on full funding of their pension plans, a prerequisite to consider a pension risk transfer. By fourth quarter of 2013, companies in the S&P 1500 that have DB pension plans had improved their funding levels to 91 percent of their obligations, levels not seen since October 2008.1
While a DB pension plan adds equity to a company, the unpredictability of its assets, liabilities, and funding ratio can add to the volatility of the company's balance sheet. In addition, internal administrative costs and Pension Benefit Guarantee Corporation premiums, which are predicted to double or even triple in the coming years, make purchasing an annuity and offloading the plan to an insurer a more attractive option.
More sellers are entering the market, too. LIMRA Secure Retirement Institute currently tracks ten companies in its group annuity risk transfer survey, with two companies joining the survey last year.
If interest rates remain favorable, LIMRA Secure Retirement Institute analysts anticipate that 2014 sales will eclipse 2013 and continue a positive growth trend for several years to come.
1Figures from Mercer Investment Consulting, Inc.