Market Pulse: Q&A with Alexandra Hyten

Perspectives, October 2016


What solutions should I consider if I want to de-risk my pension plan?

There is a range of pension de-risking options available to DB plan sponsors — from plan design changes and investment strategies that reduce risk to transactions that fully transfer risk from the plan sponsor to a third party.

  • Plan Design Changes: Closing a plan to new participants and freezing plan benefits are a great first step in managing the risk of a pension plan.
  • Liability-Driven Investing (LDI): LDI manages investment risks by closely matching a bond portfolio to the liability cash flows, reducing the volatility of pension funded status.  With this strategy, the assets and liabilities will remain with the pension plan.
  • Lump Sum Window: A plan sponsor can offer their former employees a one-time lump sum payment in lieu of their future annuity payments.
  • Partial buy-out: A group annuity is purchased for a given segment of plan participants, most commonly the retired population, while the remainder of the plan remains active.
  • Plan Termination:  In this scenario, all participant liability will be settled through either lump sums or a group annuity purchase.


What are the steps involved in an annuity placement?

The process can really be viewed in four phases: 

        1. preparation
        2. structure
        3. refinement
        4. execution

The amount of time and effort spent in each phase will vary based upon the size and complexity of the transaction.

Preparation
In this phase, the plan sponsor should define the transaction objectives, identify the internal team that will be responsible for execution of the transaction and select any outside advisors that they would like to use throughout the process.  The plan sponsor should also begin performing an evaluation of the quality of the participant data that will be needed by an insurer for the transaction.

Feasibility
In order for the plan sponsor to determine the feasibility of pursuing a buy-out, a Request for Information should be sent to insurers. This will allow the plan sponsor to get feedback on their data set, understand the number of insurers that would be interested in bidding on the transaction, gain feedback on the structure of the transaction and any limitations that insurers might have, and receive indicative pricing.

At this point, the plan sponsor will have enough information that they should begin an internal governance process so that they can obtain any necessary approvals required for the transaction.

Structure & Refinement
After receiving responses from the insurers, the plan sponsor can now finalize details of the transaction strategy and refine the transaction specifics such as which population group they would like to purchase annuities or whether they should utilize a lift-out or spin-off and termination approach. The plan sponsor can now select which insurer they would like to purchase annuities from, keeping in mind that this is a fiduciary decision and who will be playing the role of fiduciary.

Required regulatory approval should be obtained, contracts should be finalized and asset portfolios should be re-positioned in preparation for execution.

Execution
During the final stage of the process, the group annuity contract is executed, the assets are transferred and data reconciliations occur.

Who do I need to involve in order to smoothly execute an annuity purchase?

There are many different entities that can be involved in a transaction whether it is a retiree buy-out or a full termination of the plan.  Depending on the size and complexity of the transaction, the roles below can potentially be played by the same entity or might not be required. 

  • Strategic Advisor: Provides counsel throughout the process including whether or not a buy-out is the best option
  • Annuity Placement Specialist: Develops annuity bid specification and work with insurers to secure pricing quotes
  • Outside Legal Counsel: Provides expertise in areas of federal tax law, securities law, ERISA and/or state insurance law
  • Fiduciary Oversight: Selects the annuity provider carrying out the plan sponsor’s fiduciary obligations under ERISA.


How long will it take me to complete the annuity purchase process?

That will depend greatly on if it the transaction is a retiree buy-out or a termination of the full plan as well as the complexity of the transaction. A retiree buy-out can be completed in a matter of a few months, because this type of transaction doesn’t require any filings or regulatory approval in order to complete.

A plan termination can take anywhere from nine to eighteen months for a typical plan. Approval from the Pension Benefit Guaranty Corporation (PBGC) is mandatory which will consist of a 60-day window where they have the ability to disapprove of the termination.  It will be the plan’s choice if they would like approval from the IRS as well. If the plan decides to apply to the IRS for a favorable determination letter ruling, it could take up to a year to receive this approval.  The IRS does not have a set time schedule, and the time to achieve approval can vary significantly—this will be the biggest time unknown in the process.

Not having clean data is one of the most common reasons that a PRT transaction is delayed. An effective way to ensure that the process runs smoothly is to begin analyzing the quality of the plan data relative to insurer requirements early on in the process. For the group annuity contract to satisfy the plan liability, it is essential that the plan sponsor provide complete and accurate information regarding each participant, survivor and his or her benefit and features.