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The Pension Risk Transfer Market Is Thriving

Arconic’s $1 billion annuity contract with MassMutual is the latest deal in the booming PRT industry.

Aluminum manufacturer Arconic Corporation on Thursday announced that it had transferred roughly $1 billion in pension plan obligations to Massachusetts Mutual Life Insurance Company, joining a number of other U.S. companies that have recently offloaded pension liabilities to insurers.

The announcement comes just a few months after one of the busiest quarters for pension risk transfer deals in the last decade, and points to continued appetite among corporate pensions for annuity buyouts.

This latest group annuity contract marks Arconic’s third pension risk transfer transaction in the past year, according to a Pensions & Investments report. Arconic said Thursday that the deal entails the transfer of pension liabilities for around 8,400 retirees and benefices to MassMutual.

“The transaction represents the latest step in our ongoing effort to reduce legacy liabilities and the volatility associated with factors beyond our control,” Arconic’s chief executive officer Tim Myers said in a statement. 

Volatility has had the inverse effect on pension risk transfer providers: The PRT market is booming and has been for quite some time. In the U.S., pension risk transfers have been steadily increasing since 2013, totaling about $25 billion in 2020, according to Legal & General Retirement America’s pension risk transfer monitor from February. 

The last three months of 2020 were one of the market’s “largest quarters ever,” closing out the year with a volume of over $14 billion and marking the industry’s biggest quarter since 2012, the report said. LGRA attributed the high market volume in the fourth quarter to market volatility earlier in the year: The uncertainty of the first three quarters of 2020 may have caused plan sponsors to halt planned transactions and enter the market later in the year. 

LGRA, one of the country’s largest pension risk transfer providers, said in the report that 2020 was “best year to date,” with the firm surpassing $1.6 billion in premiums. 

‘A Dramatic, Unexpected Mortality Event’

Another side effect of the Covid-19 pandemic has been increased mortality rates, which for pension managers mean fewer payments to members and increased cash flows.

“A Covid environment — a dramatic, unexpected mortality event — tends to create, unfortunately, a more favorable result for us,” George Palms, president of LGRA, told Institutional Investor. “With people dying earlier, we financially benefit.” 

All things considered, many companies with pension plans would rather focus on developing their core business than managing their pension plans, Palms added. Plan sponsors and CFOs may not feel they are the best people to manage a pension fund’s balance sheet, he said. 

“When you have a pension plan, you effectively have a mini insurance company in your organization,” Palms said. “I think it gets to the point where there’s a question as to whether that's really the most efficient and effective way to operate.” 

Another advantage of pension risk transfers is the insurance premium, Palms said. Corporate pension funds often can’t (or can barely) afford the high premiums set by the Pension Benefit Guaranty Corporation, the federal organization which insures private-sector pensions. But PRT companies can. 

“If you structure a transaction where you’re drawing a line and you’re taking out a lot of people at low benefit levels, you’re able per dollar of PRT premium to take out a lot of the premium that you’re paying the PBGC,” Palms said. “It has a relatively strong bang for your buck.”  

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