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Although the idea of pension risk transfers (PRT) from plan sponsors to life insurers has faced recent legal scrutiny, the market has experienced significant growth over the past decade and has become a popular solution for plan sponsors looking to reduce balance sheet volatility and the administrative burden of maintaining defined benefit pension plans.
This is according to a WTW analysis of the market, which found PRT is increasingly appealing to plan sponsors amid rising interest rates, favorable funding levels and a growing focus on de-risking. Annual PRT transaction volume surpassed $50 billion last year on a record 401 transactions, according to the report.
By transferring liabilities to life insurers, sponsors gain cost predictability and can focus on their core business, while life insurers can grow their business while providing expertise in managing long-duration liabilities and access to diversified investment portfolios. Policyholders benefit from the continued security of their benefits, said the report.
Five jumbo retiree liftouts were recorded last year – from IBM, Verizon, Shell, 3M and Entergy – accounting for $20 billion in premium, or 40% of the total market volume. Jumbo deals exceeding $1 billion have declined, but midsize and large deals have offset this dip with significant growth. The diversification in deal sizes underscores the market’s resilience and adaptability, with 14 insurers each writing over $1 billion in PRT premium, said the report.
PRT transactions have drawn increased legal scrutiny in recent years, including several high-profile lawsuits challenging the fiduciary process. Notable cases include Grant v. Lockheed Martin and Parker v. United Technologies. Allegations typically include insufficient due diligence, lack of participant notice and input, and failure to ensure equivalent or superior protections for retirees under the new arrangement. Plaintiffs have argued that participants lose federal guarantees when their accounts are transferred to private insurers, which are regulated at the state level. The report notes that insurers must meet strict reserve, capital and investment requirements to ensure they can meet long-term annuity obligations, and many insurers hold PRT assets in separate accounts to protect them from creditors in case of insolvency.
The report said there has yet to be a clear legal precedent set concerning PRT transactions, but the uptick in legal challenges suggests participants are growing more willing to scrutinize the decision-making frameworks behind PRT transactions.
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