Taking the Risk from Longevity, Low Rates and High Premiums

Insurers are helping plan sponsors maintain pension payments while also derisking the associated long-term obligations.


Plan sponsors eager to maintain their pension funds are taking steps to ensure that longevity, low-interest-rate environments and higher insurance premiums do not affect future outcomes. Private insurers in the U.S. and Canada are stepping in to close the gap between mounting costs and the desire to derisk pension obligations. The largest plans are attempting to reduce some liabilities and lock in consistent long-term costs, whether through some form of annuity or a shift in liabilities.

Some larger pension plans are offloading risk — in some cases investment risk — by paying insurance companies to manage that risk for a fee. Locking in fixed fees allows the pension plan to maintain consistent costs while at the same time getting some peace of mind knowing that the insurer tasked with managing the risks is paying out pensions, regardless of how long beneficiaries live and how turbulent the economic environment becomes.

Since 2012, U.S. plan sponsors have shuffled roughly $40 billion in pension liabilities into insurers’ care. The most recent plan sponsor to make the shift is Irving, Texas–based consumer products company Kimberly-Clark Corp., which in February transferred $2.5 billion in pension liabilities to Prudential Insurance Co. of America and Massachusetts Mutual Life Insurance Co.. Other corporations that recently offloaded pension liabilities include General Motors Co., Motorola and Verizon Communications. Some pension experts see this more as a necessity, rather than a trend, however. Whatever the case may be, keeping liability cost management in check is paramount — especially in light of increased regulation and longevity concerns.

The Pension Protection Act of 2006 forces underfunded pensions in the U.S. to pay higher premiums to the Pension Benefit Guaranty Corp. These premiums have since continued to rise, and new mortality tables show increased life expectancy for both men and women. These trends, says Michael Ericson, an associate retirement analyst with insurance consultant LIMRA in Windsor, Connecticut, have made plan sponsors jittery over longer plan payments. He adds that funding levels for pension funds have reached prerecession levels, making the derisking insurance transfer deals easier to accomplish, since funding is one of the stipulations for the transfer to take place.

Longevity is a factor of concern for some Canadian plan sponsors. In early March Canadian telecom giant BCE signed a deal with Sun Life Financial to transfer the longevity risk of its C$5 billion ($3.97 billion) pension plan. BCE pays Sun Life a premium, and, in turn, Sun Life takes on the responsibility to make monthly payments to pensioners. Even though BCE is retaining its investment management, the telecom’s fixed monthly premium paid to Sun Life will take care of monthly retiree coverage — no matter how demographics or markets change. “If people start living longer, we are now the ones that have the longevity risk,” says Brent Simmons, senior managing director of defined benefit solutions for Sun Life in Toronto. The costs are locked in to meet that challenge. Simmons says more of these deals are in the works as plan sponsors look to manage their longevity risk.

The BCE deal was strictly about longevity, although Simmons notes that plan sponsors in Canada are using derisking strategies to handle a variety of concerns. “Some of them are around plan design, some of them are around investment, and some of them are around longevity,” he explains, adding that smaller, less sophisticated or less-adept-at-investing plan sponsors might be more inclined to do a Kimberly-Clark–style deal, in which all risks are transferred.


Large plan sponsors are seeking alternatives to meet pension fund obligations at an affordable and predictable rate. Derisking in this manner might be the solution and, if successful, might trickle down to smaller plans.

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