Published by Prudential
Executing a pension risk transfer agreement enables plan sponsors to mitigate or entirely remove future risk from their pension plans. While accomplishing such a transaction requires significant coordination among several stakeholders, it can be a straightforward experience by following a structured process and partnering with a skilled insurer.
Whether a transaction is impending, in the foreseeable future, or only being contemplated, there are steps plan sponsors can take today to ensure the process goes seamlessly when and if a solution is implemented.
This paper focuses on the how of completing a transaction. It outlines the steps involved in the most comprehensive form of pension risk transfer: a buy-out transaction. The paper describes the three basic types of buy-outs:
A full buy-out, whereby the plan is terminated and an annuity is purchased for all participants;
A partial buy-out with a lift-out, in which an annuity is purchased for specific liabilities only (typically retirees); and
A partial buy-out with a spin-off, which involves transferring a segment of participants to a separate plan (the spin-off plan). The spin-off is then terminated and an annuity is purchased for all participants in the spin-off plan.
Once a strategy is selected, the transaction process begins, which the paper outlines in four phases: preparation, feasibility, structure and refinement, and execution. The amount of work required for each phase varies based on the size and complexity of the transaction.
Given the many high-profile transactions that have occurred, as well as the improved funded status plans have experienced by transacting, plan sponsors may now find their boards of directors eager to understand the process and costs of buy-out solutions. Whats more, plan sponsors can begin preparing by getting their data and governance process in order, and conducting initial high-level feasibility assessments of potential risk transfer agreements.