The Buy-out Process
Preparing for Pension Risk Transfer
THE FOUR PHASES
The buy-out process can be viewed in four phases: Preparation, Feasibility Assessment, Structure and Refinement, and Execution. The amount of work in each phase will vary based on the size and complexity of the contemplated transaction.
Preparation — includes identifying the internal team that will be responsible for the pension risk transfer process, selecting any outside advisors, defining transaction objectives, and identifying any constraints. The transaction strategy will begin to take shape in this phase. The plan sponsor should also begin to organize plan data by determining the best source of transaction data (i.e., actuarial data versus administrative data), as well as analyze the general quality of the data relative to insurer requirements.
Phase TwoFeasibility Assessment
Feasibility — entails providing the plan sponsor’s initial transaction strategy and data set to insurers through a Request for Information (RFI) process in order to:
- Gain feedback on insurers’ ability to take on the transaction as presented;
- Assess the availability of insurers’ capital;
- Evaluate the potential use of an in-kind asset transfer versus cash; and
- Receive indicative pricing.
By the end of this phase, the plan sponsor will be better able to confirm the company’s commitment to pursuing a buy-out and begin any data clean-up or asset repositioning work required.
A governance process should also be established in this phase to allow the sponsor to obtain the necessary approvals in a timely fashion as the transaction progresses.
Spotlight: Roles in the Buy-out Process
Employer who sponsors a defined benefit plan
Determines whether to transfer DB liabilities to an insurer, and, if so, which plan participants to include in the group annuity buy-out.
Investment Bank, Consulting Firm, or, for smaller plans, Annuity Placement Specialist
Provides counsel throughout the process, including the evaluation of whether to pursue a buy-out. Develops annuity bid specifications and works with insurers to secure pricing quotes.
Life Insurance Company
Assumes the DB plan liabilities and provides guaranteed lifetime income payments to pensioners as part of a group annuity buy-out transaction.
Consulting Firm, or Annuity Placement Specialist (for smaller plans)
Selects the annuity provider, carrying out the plan sponsor’s fiduciary obligations under ERISA and working for the exclusive benefit of plan participants to select the “safest available annuity.”
Annuity Placement Specialist
Actuarial Consultant or Broker
Develops annuity bid specifications and works with insurers to secure pricing quotes.
Helps transition assets from the DB plan to the insurer. The transition manager is accountable for the investment performance of the assets being transferred, while minimizing costs and risks during the transition period.
Outside Legal Counsel
Draws up agreements related to a buy-out. Provides expertise in areas of asset transfer, federal tax law, securities law, ERISA, and/or state insurance law.
Phase ThreeStructure & Refinement
Structure and Refinement — provides the plan sponsor with time to assess results from the feasibility phase, refine transaction specifics, refine the data set for submission to insurers for formal pricing and, by the end of this phase, select an insurer from which to purchase the buy-out. In this phase, the plan sponsor will also finalize details of the transaction strategy, for example, deciding whether to terminate the plan or do a partial plan transaction, using either the lift-out or spin-off and termination approach. The selection of an insurer from which to purchase the annuities is a fiduciary decision, and the plan sponsor will decide in this phase which party will serve in a fiduciary capacity during the buy-out process. In addition, the path for any required regulatory approval will be defined in this phase, contracts will be finalized, and the asset portfolio will be re-positioned.
Execution — is the final stage of the process. The group annuity contract is executed, assets are transferred, and data reconciliations occur. During this phase, there is a very high volume of communication between the plan sponsor, their administrator, and the insurers.
1 LIMRA Group Annuity Risk Transfer Survey, 4Q 2017.