The cost of a retiree pension buy-out has been widely reported to represent a roughly 10% premium over the corresponding GAAP accounting liability. As plan sponsors update their mortality basis from the current standard (RP-2000 base table plus Scale AA improvement) to more updated tables recently issued by the Society of Actuaries (RP-2014 tables with MP-2014 improvements) this 10% premium will decrease significantly. This is because the issuance of new mortality tables for plan sponsors, which increases accounting liability significantly, does not impact an insurer’s perspective on mortality when pricing a buy-out. As plan sponsors move to a more economic view of their pension liabilities by reflecting the updated expectation of longevity, accounting liability and buy-out pricing will become better aligned.
It is expected that plan sponsors will adopt the new mortality standards over the next few years. It is likely that some sponsors will adopt the new tables before or at the same time they settle retiree liabilities via a buy-out and others will not, creating confusion for market participants, investors and analysts as they attempt to understand the economics of buy-out transactions. This is why it is simply not appropriate to compare transactions by comparing price to a sponsor’s calculation of accounting liability. To recap:
• Recognition of the new mortality tables will result in significant increases to accounting liabilities, with the average plan sponsor seeing an increase of approximately 7% for their overall plan, and 8% for the retiree liability.
• Additionally, some sponsors of plans that cover salaried employees may choose to use ‘white collar’ versions of these tables that increase liabilities yet another 3%-4% for an average retiree population.
For a more detailed discussion of the cost of buy-out relative to GAAP accounting liabilities before and after the adoption of new mortality tables, please refer to Myth 4 in Prudential’s recent white paper “Reducing Pension Risk: The Five Myths Holding Back Plan Sponsors.”
On Monday, December 8th, Prudential was named an industry innovation leader by Chief Investment Officer (CIO) in the De-risking Liability Strategies category. The award, which marks Prudential’s 4th consecutive year as a winner, was granted for its work on the $27 billion longevity risk transfer deal with BT Pension Scheme. The landmark transaction was the largest known of its kind, and involved a wholly-owned insurance firm established by the largest pension fund in the United Kingdom.
See a list of the winners at ai-cio.com.
Prudential was selected as the 2014 “Reinsurer of the Year” by Insurance Risk, a leading source of news, opinion and analysis for insurance risk managers aroundthe globe. Prudential achieved this distinction for the innovative work it has done in supporting an important growth area for the pensions industry: longevity reinsurance.
Prudential was specifically recognized for the landmark reinsurance transaction it completed with a wholly owned insurance firm established by the largest pension fund in the United Kingdom. That agreement involved more than $27 billion of pension liabilities, and was also named “Deal of the Year” by Insurance Risk. Read the article (or download PDF).
Congratulations to Amy Kessler, senior vice president and head of longevity reinsurance at Prudential, for being named as one of this year's Women to Watch from Business Insurance. The magazine is honoring 25 high-achieving women in the commercial insurance, reinsurance, risk management and employee benefits fields. Nominees were chosen based on notable career achievements as well as their outstanding efforts in the advancement of women in business.
Over the last decade, market volatility has reshaped the defined benefit (DB) pension plan landscape. Many corporations hold a disproportionate amount of risk in their pension plan, and are re-thinking how best to align those risks toward the core business.
Companies are pursuing strategies to address rising funded status – but there is no “one size fits all” approach.
Chief financial officers, treasurers, boards of directors, chief investment officers and trusted advisors have been shifting priorities from maximizing returns to pension de-risking. In fact, 48% of CFOs have already implemented or are planning to implement a pension risk transfer through buy-in or buy-out strategies.
Prudential’s approach to Pension Risk Transfer is fundamentally different. We don’t see PRT as a product. Prudential can help architect the unique combination of solutions and timing to protect and deliver promised benefits within the context of fiduciary and regulatory requirements and your core business.
Since 1928, Prudential has helped over 5,700 pension risk transfer clients provide and protect retirement security for more than 1.6 million people.
Prudential is proud and honored to be the largest provider of pension risk solutions in the United States. From the Cleveland Public Library pension risk transfer agreement in 1928 to the groundbreaking $25 billion General Motors Retirement Program for Salaried Employees transaction in 2012, each client is unique and intrinsically important.
De-risking can seem like a complex process, and our team of dedicated PRT experts is here to work alongside you as we design and execute a strategy to meet your particular challenges and strategic goals.
"Pension risk transfer transactions exemplify our capabilities, culture of multi-disciplinary collaboration, and financial strength. It’s not only about pricing. It’s about the confidence a client has in a high-quality close and execution, and doing it on a timely basis. We have very good marks for this in the industry. I doubt that any other insurer has started as early or invested as heavily as we have in this area. . . it involves risks that we know and manage well."
John R. Strangfeld, Chairman and Chief Executive Officer