Reducing Pension Risk with Buy-Ins

Most corporate treasurers are all too aware of the investment losses their pension plans suffered in the global financial crisis, and of the connection between those losses and a shift in attitude toward pension risk. In 2008, after two decades of reliable investment gains, many plans were overfunded and plan sponsors didn’t have to worry much about their asset/liability mix. However, as the financial crisis materially impacted the funded status of most large defined-benefit (DB) pension plans, plan sponsors became much more aware of their liabilities, and many began considering pension risk-transfer strategies. Although most corporate pension plans’ funded status has rebounded, few plan sponsors have shifted back to the carefree mentality of the 1990s.

The combined effects of the sustained low-interest-rate environment, market uncertainty, regulatory changes, planned increases in Pension Benefit Guaranty Corporation (PBGC) premiums, and recent changes in mortality assumptions from the Society of Actuaries (SOA) are prompting most plan sponsors to spend more time evaluating their plan’s investment performance relative to its liabilities. As a result, increasing numbers of companies are shifting to an investment approach focused on balancing assets and liabilities, and some are employing pension risk-transfer strategies to more fully mitigate their liabilities.

One such strategy is a pension buy-in. Simply put, a buy-in involves the purchase of a group annuity contract, which is then held as an investment in the pension plan. The goal of a buy-in is to mitigate funded-status volatility, longevity, and other risks. A buy-in can be used by plans that are fully funded, or by plans that are currently under-funded, to ensure that ongoing cash flow requirements are met for a specific portion of plan participants. In a recent MetLife poll, 15 percent of respondents who are DB plan sponsors and are considering pension risk-transfer options said they are likely to opt for a pension buy-in.