Almost half of sponsors to defined benefit plans will considersome form of lump-sum payouts in the next two years, according tothe Mercer-CFO Research 2015 Risk Survey.

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That data comes less than two months after Mercer, the benefitsbroker that also consults with sponsors on pension de-risking options,launched its Pension Risk Exchange, an online platform that givessponsors access to real-time bids on prospective buyout deals.

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About 60 percent of the sponsors surveyed by Mercer for itslatest report have already executed some form of lump-sum payment to vestedemployees.

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And 36 percent of sponsors said they are considering a wholesaleannuity buyout, in which all of a pension’s liabilities aretransferred via an annuity purchase, either this year or in2016.

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

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

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

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

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

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That, says McDaniel, was a key motivation behind Mercer’sPension Risk Exchange, which allows sponsors to upload specificsabout its pension plans—funding levels and metrics on participantsegments and demographics—and then puts that information out toinsurance carriers, which in turn give real-time quotes on annuitybuyouts.

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It has proven appealing to sponsors so far, he said, because itlends transparency to a pricing process that has traditionally beensomewhat mercurial.

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“Applying historical data on previous buyouts doesn’tnecessarily work well, because factors like participant segmentsand demographics are plan specific, and can affect theattractiveness of an insurers’ pricing,” said McDaniel.

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

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

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

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

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One area where sponsors won’t be de-risking liabilities, nomatter their funding level, is with lump-sum buyouts of existingretirees’ assets.

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

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

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

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So too will the overall de-risking movement, he said, motivatedby the prospect of rising interest rates, which will make buyoutannuities more attractively priced.

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Sponsors of frozen plans want the responsibility of managingpension liabilities off their books, “almost exclusively,” saidMcDaniel.

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

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

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

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

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

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