Solutions | Pension Risk Transfer

Concerned about soaring defined benefit plan maintenance costs?

Buying annuities for retirees can yield massive savings:

  • Save $60,000/year or more per 100 retirees*
  • Less to administer: For example, each retiree can cost >$20/year to process their payments
  • No impact on balance sheet: annuity price equivalent to liability value [$1 of retiree annuity purchased = ~$1 in pension liability settled]

River and Mercantile Solutions can help you to maximize the benefits of Pension Risk Transfer:

  • River and Mercantile Solutions combines extensive actuarial and investment expertise to deliver consistently strong results
  • River and Mercantile Solutions transferred $250 million for 15,000 participants in 2016, helping save clients millions of dollars in annual PBGC (Pension Benefit Guaranty Corporation) costs
  • River and Mercantile Solutions will be your partner throughout the pension risk transfer process, and will serve as an ERISA co-fiduciary
  • River and Mercantile Solutions works only on a fee-for-service basis, and receives no compensation from annuity providers

*Assumes pension plan has a deficit large enough to hit the per-participant variable rate premium cap. Gross variable rate premiums in 2017 will be 3.4% of the PBGC deficit, and will rise to over 4% by 2019.

Interview with River and Mercantile Solutions’ James Walton and Kevin Morrison

James Walton

The cost of maintaining pension plans has increased dramatically in recent years, and as a result, more and more firms are considering pension risk transfers. River and Mercantile Solutions’ James Walton and Kevin Morrison are here to explain how market conditions for pension plan risk management have changed, and why pension risk transfers have become an increasingly attractive alternative to consider…

Kevin Morrison

Frequently Asked Questions

What is pension risk transfer?

Pension risk transfer is when a pension plan sponsor offloads some or all of the plan’s risk (i.e. retirement payment liabilities to former employees). The plan sponsor can do this by offering vested terminated plan participants a lump sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits for current in-pay retirees and beneficiaries. Companies transfer pension risk to avoid volatility – they no longer have to pay for pension obligations transferred – and to free themselves to concentrate on their core businesses.

The total annual cost of a pension plan can be hard to predict due to variables in investment returns, interest rates, and the longevity of plan participants. Large companies had been holdouts to the national trend of transferring pension planning responsibility to employees, but that began to change in 2012, when a range of Fortune 500 players sought to transfer pension risk. This included Ford Motor Co. (F) , Sears, Roebuck & Co., J.C. Penney Co. Inc. (JCP) and PepsiCo Inc. (PEP) – which offered former employees an optional lump-sum payment; and General Motors Co. (GM) and Verizon Communications Inc. (VZ) – which purchased annuities for retirees.

[Source: Investopedia]

What changes are making pension risk transfer attractive now?

Over the prior four years, the future rates used in determining the premiums paid to the PBGC have been increased three times for single employer defined benefit plans. Currently the flat rate premium (per participant) and the variable rate premium (liability based) rates scheduled for 2019 will be over two times and over three times the rates that applied in 2012, respectively. Combined with other changes in market conditions, some plan sponsors are expected to see total premiums that are four to five times the levels that were paid just a few years ago. Reducing liabilities and participant counts through pension risk transfers are one way we are helping clients in reducing the impact of these premium costs.

What is the Pension Benefit Guaranty Corporation?

The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations.

[Source: Wikipedia]

Pension Plan Annuity Purchases: The Time is Now!

Why River and Mercantile Solutions?

Our team of actuarial and investment professionals work side-by-side to help plan sponsors through the pension risk transfer process. Because we analyze and understand the implications of enacting a pension risk transfer on both the liability and asset sides of the funded status equation, we are best suited to help plan sponsors make the optimal decision for their plan and its participants. We also routinely sign on as a co-fiduciary with the plan’s fiduciaries in selecting the safest available annuity provider. Our fees are also transparent as we work on a fee-for-service basis and do not rely on commissions that are baked into the annuity purchase cost. We also do not receive any outside compensation from annuity providers for annuity placements.

We employ a two-step, competitive bid process where we solicit initial quotes from the pool of insurers and then give each insurer an opportunity to refine its quote in the final bid. This process ensures that the quotes are as competitive as possible. The insurance companies from which we solicit bids are fully informed of and appreciate this process as they know we will not keep coming back to them for additional “final” quotes. This means we get their best and final quotes when we ask for them and we don’t play games that would jeopardize the integrity of our process.

Our analysis is detailed in a comprehensive report which documents the key criteria in selecting the annuity provider as required by the Department of Labor in their Interpretive Bulletin 95-1 (selecting the safest available annuity provider). In addition to summarizing the annuity quotes and the ratings of the insurers, our report includes analysis of:

  • The composition of each insurer’s investment portfolio and bond portfolio;
  • Each insurer’s capital and surplus levels, lines of business, and guarantees;
  • A comparison of the annuity quotes to the associated actuarial liability; and,
  • A recommendation on which insurers can be considered the safest available.

We also have detailed information that we collect regarding each insurer’s on-boarding process, their investment structure, the enterprise risk management structure of the company, and experience and administrative capabilities. This additional qualitative data can help plan sponsors differentiate between insurers that could both be considered the safest available annuity provider and ensure that plan fiduciaries are acting in the best interest of their plan participants.

Following the selection of the annuity provider, River and Mercantile Solutions continues to stay involved until the selected provider begins making payments to the participants. Our role during this time is largely to facilitate the transition by coordinating contracts, assisting with asset transfers, and helping answer questions related to data validation.