Scott Kaplan, senior vice president and head of Prudential’sPension Risk Transfer business, which now oversees $60 billion ofU.S. pension liabilities, says it is by design that he and his teamare pacing the surging pension buyout market.

The Pension Protection Act of 2006, which the Society ofActuaries has called “the most significant overhaul to U.S. pensionfunding regulations since ERISA,” sent a clear signal to Prudentialthat the pension transfer market was poised toopen up, said Kaplan.

Read: Liabilities at largest private pensions atall time high

The PPA intensified pension sponsors’ funding requirements whenplans’ funding statuses dropped below 90 percent, among otherthings. When the law was passed, the average corporate pension planwas funded at 96 percent, according to the GovernmentAccountability Office.

Then came the financial crisis. Between year-end 2007 and thespring of 2009 the average funding status plummeted to 70percent.

While it has since improved—Milliman’s pension funding index hasit hovering in the low to mid 80s—it is still well below the 90percent threshold established in PPA.

“As sponsors were suddenly experiencing tremendous and newvolatility from markets and regulators, our goal was to establishourselves as a market leader, well before theVerizon and General Motors deals,” explained Kaplan.

When Prudential inked a $25 billion pension transfer deal withGeneral Motors in 2012, it marked a watershed moment in an oldindustry. Kaplan says Prudential has been in the pension transferbusiness since 1928.

The scope of the GM deal—Prudential assumed the pensionliabilities for 110,000 participants—was viewed by most industrywatchers as a signal that sponsors now had almost a perfunctoryobligation to at least consider de-risking some assets goingforward.

“You’d be hard pressed to find a pension sponsor in the countrywhere the board members and management aren’t at least setting outto understand the option,” said Kaplan.

Prudential quickly followed the GM deal by taking on $7.5billion in pension liabilities from Verizon, Inc. In 2014,$8.6 billion in liabilities were transferred market-wide, makingthis the second largest year since 1990, according to LIMRA SecureRetirement Institute. Prudential’s deals with Bristol-Meyers Squibband Motorola accounted for more than half.

Kaplan says Prudential’s ability to deliver unbiased advice tosponsors, along with the insurer’s longstanding capability managingfixed-income assets—it has about $565 billion in fixed-incomeassets under management—have helped secure those massive de-riskingdeals.

“We’ve been in the business of underwriting mortality andlongevity risk for years,” said Kaplan. “We’re also the only onesin the business that has a world-class fixed income managementbusiness unto itself.”

Only the beginning

Wayne Daniel, head of U.S. pensions at MetLife, which managesabout $38 billion in pension liabilities, expects the pensiontransfer market to grow for decades.

Premium increases to the Pension Benefit GuarantyCorp. recently passed in the budget bill will onlyserve to accelerate what was already a “buoyant” market, saidDaniel.

“When you consider the nature of the liability—it requiresmanaging longevity risk and liquidity risk—all of that plays to thestrength of a large, diversified insurer,” said Daniel, explainingin part why more insurance companies and investment managers areaggressively positioning themselves in the market.

Market opportunity going forward will be huge, as only about 5percent of $3 trillion in pension promises have been de-risked thusfar, according to Daniel.

“We don’t expect all of that to come to the marketimmediately—that would create a bottle neck. But we do see totalsales hitting as much as $11 billion this year. Five to $10 billiona year in industry sales would mark a sustainable level of growthgoing forward,” said Daniel.

Daniel said he has seen a fundamental shift in sponsors’thinking in the last two years relative to interest rates.

Historically low interest rates have not only had a negativeimpact on sponsors’ funding levels and premium payments to PBGC,they have also made the premiums on pension transfer annuities moreexpensive.

“Sponsors’ thinking has evolved. Up until a couple of years agothe instinct was to wait for interest rates to rise beforeventuring into the market. But more are preparing to de-riskirrespective of interest rates. As sponsors have waited forinterest rates to rise, they’ve also experienced more fundingvolatility, more market volatility, more premium volatility,” saysDaniel.

Whatever can be saved on a transfer premium from a marginalincrease in interest rates may be more than offset by the cost ofincreasing funding volatility, explained Daniel.

“It’s why we continue to be bullish on the level oftransactions,” he added.

Some industry observers have suggested that sponsors havebenefited from more aggressively structured deals, as moreinsurance companies enter the market to compete for a growingpipeline of business, and as other areas of insurers’ balancesheets also bear the brunt of equity market volatility and lowinterest rates.

Daniel, for one, disagrees with that analysis. “This is verymuch a competitive market, where pricing is subject to considerablescrutiny, but I don’t find it’s more competitive than before.”

He says MetLife takes the long view on required capital returns,and draws on its established price modeling when structuring adeal. “Whatever others are pricing is almost irrelevant,” saidDaniel.

Both Kaplan and Daniel said their respective teams regard theirobligations to participants as sacrosanct. Each also said moresponsors are keying on the administrative capabilities of insurers,and whether they can sufficiently service participants’ needs in tothe future.

“Those abilities are where the rubber meets the road in many ofthe deals,” said Daniel. “Sponsors need to feel comfortable that wehave the ability to communicate with participants whenever theyneed us. It’s far more complicated than simply managing apayroll.”

Know your options

Jason Richards, senior risk consultant with Towers Watson, agrees that most largeplan sponsors have at least started the process of assessing ade-risking strategy.

He and his team advise sponsors on the pricing of de-riskingdeals. “We have no bias for any insurers—we don’t help our clientspick a carrier. They, and their third-party fiduciaries, wheninvolved, make that decision.”

These days, multiple insurers are typically bidding on a deal,which is helping sponsors get competitive pricing.

“This is a good market for sponsors—you only need two insurancecompanies to make the biding competitive,” said Richards. “We’reseeing many cases where the cost of annuitizing retirees is lessthan the economic cost to maintain those obligations.”

Generally, pricing has been at a level where plan sponsors arecomfortable with the transactions, said Richards. But beyond that,generalizations on the market end fairly abruptly.

“I’d say be very wary of one-size fits all solutions,” saidRichards. “Two sponsors with the exact same pension obligationsoften have measurably different liabilities. Our only real initialadvice for sponsors considering setting out on a de-risking path isto understand your options.”

In the end, the decision to de-risk will always rest on asponsors’ ability to do so, of course.

From there, the more subjective question of how much morevolatility a sponsor is willing to bear trying to capture equitypremium in pension assets has to be addressed.

“Every plan sponsor is going to answer that questiondifferently,” said Richards.