Matt McDaniel, Mercer’s U.S. Defined Benefit Risk Leader, explained that “dynamic de-risking” strategies, which not long ago were an alternative approach to managing pension risk, are moving to the mainstream.

Simply put, dynamic de-risking is “an investment strategy that’s reactive to funding status,” explained McDaniel.

“As pension funds become better funded, sponsors have less incentive to take risk,” said McDaniel. “More sponsors are looking to take risk off the table.”

Increased mortality assumptions, falling funding ratios in 2014 and premium hikes to the Pension Guaranty Benefit Corp. are the factors in what Mercer calls the “perfect storm” spurring more sponsors to explore de-risking options.

But the low-interest rate climate, which has added to sponsors’ annual funding volatility, has also made annuity buyouts more expensive, and put some sponsors’ ambition to pursue de-risking options on hold.

That, says McDaniel, was a key motivation behind Mercer’s Pension Risk Exchange, which allows sponsors to upload specifics about its pension plans—funding levels and metrics on participant segments and demographics—and then puts that information out to insurance carriers, which in turn give real-time quotes on annuity buyouts.

It has proven appealing to sponsors so far, he said, because it lends transparency to a pricing process that has traditionally been somewhat mercurial.

“Applying historical data on previous buyouts doesn’t necessarily work well, because factors like participant segments and demographics are plan specific, and can affect the attractiveness of an insurers’ pricing,” said McDaniel.

“Pricing is driven by sponsors’ specific financials,” he added, and not the terms of past deals.

The real-time pricing information is also expediting the buyout process, which historically has taken six to nine months. Now those deals can get done “in a matter of weeks,” said McDaniel.

Statutorily, plans are required to be funded at a minimum of 80 percent to execute an annuity buyout.

But McDaniel says most of the plans Mercer works with are either “quite well funded, or have the ability to make cash infusions to improve the plans that are concurrent with the annuity buyout.”

One area where sponsors won’t be de-risking liabilities, no matter their funding level, is with lump-sum buyouts of existing retirees’ assets.

That’s because the IRS recently prohibited such deals, as of July 9, with certain exceptions for sponsors that have made plan amendments accounting for such buyouts already in the process of execution.

“I think that took everyone a bit by surprise. We did know regulators were looking at all buyouts, but we weren’t anticipating the rule to come out so quickly,” said McDaniel.

It should not monumentally affect the pension de-risking market, as a greater area of sponsors’ interest of late has been relative to lump-sum buyouts for vested terminated employees. That trend should continue unfettered, said McDaniel.

So too will the overall de-risking movement, he said, motivated by the prospect of rising interest rates, which will make buyout annuities more attractively priced.

Sponsors of frozen plans want the responsibility of managing pension liabilities off their books, “almost exclusively,” said McDaniel.

And life insurance companies are attracted to the deals because the mortality risks in annuities can be hedged, as opposed to life insurance products, which carry more mortality exposure, he explained.

As many as eight insurers have been active in the market, with another two or three new carriers looking to grow into the business.

There is also some talk of that field growing, as insurers based in the United Kingdom, which has a much more mature de-risking market than in the U.S., are eyeing the market here, according to McDaniel.

That means insurers have the capacity now, and the willingness to price buyout annuities competitively, he said.

As the market continues to grow, that may change, as more deals account for what is for the time being a surplus of capacity, another consideration sponsors must weigh as they consider whether and when to de-risk, said McDaniel.