Market Pulse: Q&A with Alexandra Hyten
Perspectives, January 2017
1) The market has been growing the past several years, where is 2016 going to end up?
The activity in the PRT market was relatively quiet during the first half of 2016 with volatile equity markets and low interest rates. However, the market experienced record-breaking buy-out sales of approximately $5.9 billion (LIMRA GART) in the third quarter and continued to be strong through the end of the year.
As we have seen in years past, the jumbo market continues to be volatile, but two notable transactions did close (West Rock and PPG). The big story of the year was the robust activity in the $100 million–$500 million space, where we noted a large uptick in deal volume in comparison to previous years. We currently estimate the market to close on par with results from 2015 with $14 billion+ in PRT transactions, a respectable outcome given the challenging market conditions.
2) Why do you think there was more activity in the under $500 million market?
A majority of the activity in this space was driven by small balance retiree buy-outs and plan terminations. Many plan sponsors are reacting to the rising PBGC costs by executing buy-out transactions for retirees with small balances. The retiree group is the most efficient to transfer to an insurance company and the small benefit subset of the retiree population is particularly economical for plan sponsors because it reduces the most headcount and provides the most PBGC premium and administrative savings.
We are also seeing companies executing incremental risk transfer transactions, spreading out the impacts of settlement accounting. Companies that have decreased the headcount and size of their plan through lump sum windows for terminated/vested participants are looking for the next step to de-risk. Retiree buy-outs have proven to be the next logical step in the progression. Plan terminations are often simplified with fewer participants remaining in the plan as they reach the final stage of the de-risking process.
Finally, while there has always been a lot of plan termination activity in the <%100 million space, this year we saw an increase in the size of plan terminations that were occurring. Once again this was driven by the increase in the total cost to maintain a pension plan.
3) With interest rates and equity markets rising towards the end of the year, what implications will that have for 2017?
We expect to see more activity in 2017 than previous years if the equity markets and interest rates behave as economists have predicted. Many companies have claimed low interest rates as being a barrier to further de-risking in recent years, but these same companies have also taken steps to prepare for a transaction through cleaning data, positioning their portfolio, etc. Once interest rates rise enough to hit internal trigger points, these plans will be ready and will likely transact.
We also anticipate seeing companies who had transacted previously to come back to market in 2017 with an additional transaction. Plan sponsors are hungry to de-risk so as soon as the economics make sense for them they will look to shrink the size of their plans further. We have already seen this phenomenon occur multiple times in the fourth quarter of 2016 once interest rates started to increase.
4) What advice do you have for sponsors who may be thinking of PRT given improving funded statuses?
A plan sponsor will want to be ready to act when the optimal time occurs. They will need to begin identifying and mobilizing the internal team that will be responsible for the pension risk transfer process, select any outside advisors, define transaction objectives and identify any constraints. The plan sponsor should have plan data organized and accurate, and also be thinking about how to most efficiently position assets for an efficient transaction.