The pension risk transfer market: Insights, trends and regulatory changes

CAITLYNN GREENFIELD: Yeah, hi, everyone. I'm happy to be here. So yeah, Caitlynn Greenfield, based out of WTW's Philadelphia office. Been here for a little bit over a decade now. I lead the Philadelphia office Life Practice and the U.S. PRT Initiative. I've been heavily involved in helping insurers and re-insurers in the PRT space. I started my career working heavily in our firm's proprietary modeling systems, heavily in the annuity products. That was easily leveraged into some of the PRT work that I've done today. So really it was the starting point, and today I spend the majority of my time on PRT. Thanks for having me.

MARK MENNEMEYER: Yeah, great. Thanks for being here. Stan, over to you.

STAN ROBERTS: Thanks, Mark. I've been with Willis Towers Watson my whole career and started off in the pension department as pension actuary supporting plan sponsors, helping them with plan design, valuation, and bulk lump sums, plan terminations, all the stuff that a pension actuary normally goes through with a plan sponsor.

And then, when the market started picking up speed, found some interesting projects helping insurance companies that were seeking to enter the pension risk transfer market. So we collaborated with several life insurance actuaries and representatives from insurance companies, and those pension actuaries who are involved on the plan sponsor side, and we brainstormed ideas on how to value, and price, and predict what would happen in the pension risk transfer market.

So we've been doing experience studies on mortality. We've done studies on other assumptions and techniques in modeling and pricing. We help insurance carriers enter the market, continue pricing, and also some of the activities after they've won the deals. So I've been involved in all aspects of pension risk transfer.

MARK MENNEMEYER: Great, well, thanks, both of you. Clearly some really good expertise, both from the plan sponsor perspective and from the insurer perspective, so looking forward to getting right into the topic. And let's dive in. Just to kick things off, can you give some background on the U.S. PRT market and current estimates of the size?

CAITLYNN GREENFIELD: Yeah, maybe I'll start and Stan can fill in any gaps I missed. So as you mentioned, Mark, the PRT market has grown rapidly in recent years due to the increasing cost and complexities associated with defined benefit pension plans. So in 2023, we saw transactional volume coming in around 45 billion. 2022 was actually the record breaking year for the PRT market, with a staggering, I want to say, 52 billion in premiums.

2022 record breaking year was driven largely by an 18 billion split insurer transaction for IBM. So while 2023 lagged the transactional volume that we saw in 2022, 2023 still had the highest number of transactions. So still quite a robust year for the PRT market in 2023.

Looking at 2024 and ahead, we are very optimistic and bullish on the PRT market. We're anticipating transactional volumes to come in around 50 billion. So again, continually increasing. And there are some headwinds impacting the space, but for right now, we are still quite optimistic and bullish on the PRT market.

STAN ROBERTS: Right, I think some of those reasons, the funded status has improved, which allows plan sponsors to be a little more flexible, and there's more planned termination readiness activities that have been taking place over the last few years. So we're ramping up some of those plan sponsors that have been thinking about it. Now they're getting closer and closer to that time to act.

MARK MENNEMEYER: Thanks for that. So as we see this volume continuing to be so large, can you talk a bit about who are the key U.S. PRT players?

CAITLYNN GREENFIELD: Yes, so right now in the US, there are 21 direct writers of PRT. This is a 30% increase to what we were seeing in 2019. So we're seeing more and more entrants enter the PRT space, which is definitely increasing competition, as you'd expect.

Quite a diverse group of players in the US. So we have collectively publicly traded mutuals and private equity backed players. In terms of markets, there is quite a bit of segmentation in the PRT market. So we have some players that target large deals. There's three to four different ways you can split up the market, from small, medium, large, and jumbo.

Some of the players, your Athenes, Prus, and MetLife, they're targeting jumbo size deals greater than a billion in size. But all 21 players typically consistently bid in one area of those markets, and then spin out in some of their bids into some of the other areas.

In addition to size, some of the segmentation we see in the market is regarding complexity. Some of these players focus on just retiree only. Others add more complexity by adding deferred obligations. So there are some that limit their deferred obligation within deals. And then of course, there are those that have as much deferred complication within a given transaction.

In addition to the diversity we see in the target markets, some of the players, their administrative capabilities vary. Some players are able to handle PRT administration in-house, while others outsource it to third parties. So definitely a diverse group of U.S. players in terms of where they are targeting their deals, as well as their capabilities and risk appetites. Anything I possibly missed there, Stan?

STAN ROBERTS: That's good. Covered it.

CAITLYNN GREENFIELD: Great.

MARK MENNEMEYER: OK, yeah thanks for that overview. You talked a bit about the growing number of participants, so clearly there's an increase in competition. What are some other notable trends that you're seeing in the PRT market?

CAITLYNN GREENFIELD: Yes, some of the notable trends that we're seeing is the increase in plan terminations. More and more of the plan sponsors are looking to completely offload their pension obligations, rather than conducting lift-outs of certain subsets.

And so somewhat correlated to the increase in planned terminations is the prominence of deferred lives within transactions. We are seeing a rise in that. Managing deferred liabilities requires more sophisticated assumption setting and modeling. So this increased trend is definitely adding some of the complexities of the deals that are coming to the market.

STAN ROBERTS: Yeah, there's some complexities that we've heard of and seen in the market as well-- buy-ins versus buy-outs. Those weren't as prevalent a number of years ago. And even things like retiree medical risk transfers. Just little unique, innovative ways that the insurers are thinking about dealing with these transactions and trying to be more competitive.

MARK MENNEMEYER: Just for everyone who might not be doing this as frequently, could you just go ahead and define the difference between buy-in and buy-out?

STAN ROBERTS: Sure. Buy-ins usually happen before the plan is completely terminated, and so it may be a temporary period, a year or two, where the plan sponsor agrees to a contract with the insurer. And they enter into maybe an initial price or preliminary price, but they share in some of the investment returns during that period.

And the administration may stay with the plan sponsor during that time until, for example, the bulk lump sums or the plan terminations are completed. And then it usually converts to a buy-out, where from that point forward, the plan sponsor has washed their hands of the liability and the obligation, and that completely transfers over to the insurer in a buy-out. So a buy-in is a little bit more of a shared, riskshared obligation between the two parties for a short period of time, and the buy-out is where it's all on the insurer. That's a simple way to describe it.

MARK MENNEMEYER: Is it safe to assume that the plan sponsor is generally going to be more excited about the buy-out and getting the obligation completely off their books?

STAN ROBERTS: It is. But to a certain extent, they're also looking to get some kind of guarantees during that buy-in period as well. So I think that's why buy-ins can be attractive to plan sponsors. And those insurers who are willing to consider that option can likely get a foot in the door compared to others who won't consider it.

MARK MENNEMEYER: Yeah, that makes sense. Thanks for that. Let's go back to talking about deferred lives. Caitlynn, you mentioned that as one of the trends, and I'm sure there's a lot of complexity here. So Caitlynn and Stan, could you both talk about some of the key considerations when you're pricing deferred lives?

CAITLYNN GREENFIELD: Yeah, I'm going to let Stan handle that one because he is undoubtedly our deferred expert.

STAN ROBERTS: Sure. First off, the deferred lives are not in payment yet. So with their pension, they have choices that have not been made yet. So that's the number one thing, is there's a lot more uncertainty. Timing and size of these pension payments. The commencement age or retirement age is unknown. And of course, when they do commence, they can choose between a range of optional forms of payment-- single life annuities versus joint and survivor annuities, or even, in some cases, still lump sums that are ongoing as an option.

So having to make assumptions for the timing and for the form of payment is something that doesn't exist in the in pay, so that produces some more complexity and pricing deferred pensions. Also, how material are these optional features? Some of them are very material. The age and the form of payment, those two are probably the biggest ones. But you have spouses and what to assume for future spouse, like the age difference, are they married.

Also, usually there's a few smaller groups of people in there, like deferred beneficiaries. They're not the original employees or participants, and sometimes you have a small group or a few of disabled employees that are still in the pension, but haven't commenced their normal pension. So there's a decision on, should you price them differently than others? And you can make the case either or. So(Re)thinking Insurance — A WTW podcast those kinds of decisions on materiality always surface, and you should be prepared to think through those, how you would price them if you would price them different, and how to administer them if they're going to administer them differently.

And economic assumptions as well. So sometimes these lump sum options, if they're still part of the ongoing plan that the participants can elect later on down the road, you have to make an assumption now when you price it for the interest rates that get used to convert the annuity to a lump sum. Whether it's a static rate or if you're trying to build some sort of forward curve into your model, those kinds of economic assumptions may or may not coincide with the way your invested assets will be running out.

So assumptions is a big part of the deferred pricing. And when you're picking assumptions, you would love to see all the experience from that plan, but that's rarely given to the insurers that are pricing. Sometimes there's mortality experience, but we're talking about just deferred specific assumptions. So we usually do not see the retirement age experience or the lump sum experience. We can request that. That's useful if the plan sponsor is willing or able to provide it. But sometimes you have to make assumptions on limited data, and that's challenging at times.

And in general, insurers have a little bit different view on assumptions when compared to pension actuaries. So even if you can see what the pension actuary who serviced the plan in the past used for their assumptions, they're of course viewing things from a perspective of plan, valuation, and funding, and there's a little bit different viewpoint from an insurer.

Pension actuaries typically view the assumptions as best estimate. They have the opportunity to change them once a year when they do the annual valuation. So if you're looking at their annual valuation assumptions and you're an insurance actuary trying to price it, you have one chance to get it right. It's the pricing point. If you get those assumptions wrong, there's not an opportunity to reprice it down the road.

MARK MENNEMEYER: Yeah, that's a really interesting contrast between the pension actuaries and the insurer annuity type actuaries. It's also interesting from the insurer's perspective because it sounds to me like some of these assumptions insurers have some experience with already, especially around the economic assumptions. You have to set economic assumptions for many types of products. Whereas others, this is brand new. Many insurers, I would assume, have very limited experience trying to develop assumptions around when retirement age is going to start, for example.

STAN ROBERTS: Right. And to go with that, there is some indexes that are published. The IRS publishes interest rates required to be used for lump sum conversions. But that published set of rates isn't exactly something that you can observe in the market. It's always derived from some market-based observation. So there's always a little bit of noise in there.

CAITLYNN GREENFIELD: Yeah, and one thing I'll just add is the industry data for deferred lives is limited as well. There aren't a ton of studies right now available for insurers to leverage for deferred demographics, so it adds to the further complexity in developing those assumptions.

MARK MENNEMEYER: Yeah, clearly lots of challenges there. So let's switch gears a little bit and talk about any upcoming compliance or regulatory changes on the horizon that could impact the PRT market.

CAITLYNN GREENFIELD: Yeah, definitely. So Department of Labor's Interpretive Bulletin 95-1 is definitely a key area that everyone has their sights on. So the selection of an annuity provider within a PRT transaction is a fiduciary act under ERISA. And the primary purpose of the fiduciary is to safeguard the interests of the plan's participants and beneficiaries.

And so guidance on assessing insurers for this fiduciary within the selection process is provided under the Department of Labor 95-1. I think that will definitely still send a signal to the PRT market and could impact some of the momentum we're seeing.

STAN ROBERTS: Maybe add one little thing there to the compliance and regulatory changes. SECURE Act 2.0 recently, one of the things it did is delay the required oldest age you can commence, or sometimes called the required minimum distribution age. Extended it from 72 to 73 for a short term. And then I think, even in a few more years, it extends it further out to 75.

So I'm not sure that's a major change. I think the number of people who are expected to continue working or delay their pensions that late is still relatively small. But as mortality improves, maybe that'll become more common. But it's one extra thing to add to the wrinkle of complexity.

And then VM-22 is something else we've heard. There's a working group that's reviewing the VM-22, which is standard valuation law for annuity-type contracts that is underway. I don't know if we have an expected date for when that information will come out, but obviously, interest rates are prescribed by VM- 22. But there's an expectation that rules around contracts like pension risk transfers may be included in that, and insurers may be expected to react accordingly.

CAITLYNN GREENFIELD: Yeah, agreed, Stan. Good point on mentioning the VM-22. We know some of the field test is happening now, so we expect that, I would say, I believe the original date was 2025. I know it's being pushed further out to that, but our expectation is that VM-22 will be advising a PBR-like approach, like we saw in VM-21, that would impact PRT.

MARK MENNEMEYER: Yeah, and I think we'll stand by to see if this changes again. But I think the latest is that we're expecting a 1-1-26 implementation of VM-22, possibly over multiple years, like a three year implementation period. Does that sound right to you?

CAITLYNN GREENFIELD: Yep, yeah, that time frame. I know it was pushed, so it's interesting. Right now we're using the field testing as a barometer. So once we see that complete, I think that we'll get more assurance on when an actual implementation date will be. So I think it's continually evolving, especially around the timelines.

MARK MENNEMEYER: OK, well, we've covered a ton of ground, although I feel like, in some ways, we've also just scratched the surface because there's just so much activity in the PRT space. But thanks for covering all that. Just before we wrap up, I want to ask each of you, any final comments? Caitlynn, anything else that you wanted to cover?

CAITLYNN GREENFIELD: It's one other thing that we're seeing that's quite of interest in the market and we're keeping a close eye on is the use of reinsurance. We've seen quite a bit of increased usage right now in the market, at least increased interest.

One of the things that we use as our key barometer in this is WTW conducts a survey of about every two years. It's a pension risk transfer pricing survey. We started in about 2018. In 2022, respondents indicated that about 30% were using some form of internal or external reinsurance affiliated onshore or offshore, but about 30%.

We're in the process right now of conducting our 2024 survey. And while results are still preliminary, we are seeing a sharp increase at that rate. So we're interested to see and talk to some of the players right now to see how much has changed in the past two years, and it's definitely a key area that we are keeping our eye on.

MARK MENNEMEYER: Great, and looking forward to seeing the results of that survey. And Stan, what about you? Anything else that you wanted to add before we end?

STAN ROBERTS: Yeah, I was just going to mention, we're anticipating this survey. It's a good time that we get to talk to a lot of the insurers that are involved and hear new questions that we didn't think of, and I think that maybe those who are listening to this podcast might be participants in that survey, so I'm sure they're anticipating it as well.

MARK MENNEMEYER: All right. Well, thanks both of you for sharing your perspectives today. Caitlynn, great to have you on the podcast.

CAITLYNN GREENFIELD: Yeah, it's great to be here. Thanks for having us.

MARK MENNEMEYER: And Stan, you too. Thanks for joining.

STAN ROBERTS: Yeah, thanks, Mark. Thanks for having us. It was fun to talk about this topic, and I'm always interested in talking about it more.

MARK MENNEMEYER: And to all our listeners, I hope you enjoyed this, and we'll catch you again on the next episode of (Re)thinking Insurance.

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