"If sponsors are not that well-funded, then they're really looking more toward operational efficiencies," said Jason Richards, a consultant in the retirement risk management group at Willis Towers Watson. "They're trying to have the funded status improve, and they're taking actions that reduce the drag on operations so it doesn't cost as much to run the plan.

"It costs the same amount to administer benefits whether [retirees are] getting $50 a month or $5,000 a month," he added. "By transferring people with small benefits, you can significantly reduce your ongoing operational costs and administrative costs. That's where we see a real increase in activity over the last two years."

Lynn Esenwine, a partner and senior pension risk transfer consultant at Mercer, said the premiums that plan sponsors pay to the federal Pension Benefit Guaranty Corp. (PBGC) are another factor fueling the focus on transferring obligations, particularly to those with smaller benefits.

The PBGC's per-participant premium has risen steadily: It is $69 this year for single-employer plans, up from $31 in 2007, and it will rise to $74 next year. There's also a variable-rate premium paid by underfunded plans, which is calculated based on the plan's unfunded vested benefits.

"For plans that were underfunded to some degree, we see them paying $600 a participant every year to the PBGC," Esenwine said. "In light of that, we've seen a very keen focus on small-benefit buyouts for retirees—somebody who's getting paid $50 a month—and the impact that has on your expenses—administrative expenses, PBGC fees."

For example, in October, International Paper transferred $1.3 billion of pension liabilities to Prudential, representing its obligations to roughly 45,000 former employees or their beneficiaries whose monthly benefits were less than $450, according to a company press release.

In the statement, CFO Glenn R. Landau cited the transaction's role in "enabling International Paper to better manage future costs associated with our pension plan."

Similarly, in October 2016, United Technologies transferred $775 million of pension obligations to Prudential, which the company said covered 36,000 retirees or their beneficiaries whose monthly benefits were $300 or less.

2012's Mammoth Transactions

Pension risk transfers made headlines in 2012 when General Motors handed off $26 billion of pension obligations and Verizon did a $7.5 billion annuitization. Willis Towers Watson's Richards said that after a slow year in 2013, the total amount of pension plans' purchases of annuities has climbed steadily, hitting $13.8 billion in 2015 and $14 billion in 2016. The data on pension plans' annuity purchases includes both partial annuitizations and plan terminations, in which the sponsor transfers all future obligations to an insurer.

Through the first three-quarters of this year, pension plans purchased $12 billion of annuities, but Richards expects the total for the year to come in around $20 billion. "A lot of activity happens in the fourth quarter," he said.

And he expects next year's activity to exceed this year's. "How much more is a little tough because it depends a lot on what happens with markets," Richards said. "As plans get better-funded, more and more of them want to transfer some of these obligations. So activity in 2018 could be significantly more if interest rates rise or markets do well or more sponsors put a lot more money into their plan such that they're better funded."

He noted that $20 billion of de-risking transactions is just a tiny portion of the $3 trillion of pension obligations that companies have. Richards estimates that if plan sponsors could, they would transfer at least three-quarters of those obligations. Most companies "want to make widgets, not administer pension obligations," he said.

Kelly Regan, a senior consultant at investment consulting company NEPC LLC, said NEPC's 2017 survey of trends in defined-benefit plans showed 31 percent of plan sponsors are considering or planning annuity buyouts, up from 20 percent in the 2015 survey. Twenty percent said they were considering or planning a plan termination, down from 23 percent in 2015.

Lump Sums

There are no comprehensive numbers on companies' offers of lump-sum buyouts to pension plan participants. But the NEPC survey showed 75 percent of plan sponsors were considering or planning lump sum offers in 2017, which is down from 83 percent in 2015.

Richard Chari, an NEPC consultant, noted that the Society of Actuaries' updated mortality tables will be phased in next year. The updated tables show U.S. citizens living longer lives and consequently will make lump sums more expensive, which may discourage plan sponsors from offering them.

"Just by phasing in those new mortality tables, it resulted in an increase in the lump-sum liability of 10 percent to 12 percent," Chari said.

Insurance Market

When annuity purchases skyrocketed in 2012, there were some concerns about the insurance market's capacity for such transactions.

Esenwine, pictured at left, notes that the market has grown since then. "There are now 15 competing insurance companies," she said. "In 2012, there were maybe five or six, and really two or three [bidding] on any transaction."

Despite that growth, she said that if interest rates rose 50 basis points, there could be enough demand that the insurance market might not have enough capacity, "particularly for plan terminations, which are riskier for insurers to take on."

Esenwine noted that the market includes both big publicly traded insurers with lots of capital, like Prudential and MetLife, and mutual companies, which have less capital. And constraints aren't just about capital; insurers can have a hard time coming up with all the administrative capacity that's required, she said, particularly if lots of deals emerge toward the end of the year.

Some plan sponsors divide an annuity purchase between two insurers. Such split deals occur more often when the total transaction size exceeds $500 million, Esenwine said. "Not all insurers can do $1 billion at one clip."

Willis Towers Watson's Richards said some transactions involve both retirees and participants with deferred benefits; some insurance companies prefer one type and some the other. "You might be able to get a better price by transferring those to different insurance companies," he said.

If a deal is split between two insurers, one serves as the lead administrator, and that is the only insurer the plan participants would deal with, Esenwine said. "They only call one insurance company; they only get one tax form."

Splitting an annuity between two insurance companies can benefit participants, she said. Once a retiree's benefits are being paid by an insurer, they're no longer backed by the PBGC but by state insurance guarantees. "Each state guarantee has a dollar limit that's covered, so splitting a transaction means that in theory you double that protection," Esenwine said.

Another variation on traditional annuity transactions is asset-in-kind deals, in which insurers consider taking some of the securities in a pension plan's portfolio in exchange for an annuity.

"The insurers will look at your individual maturities and evaluate those," Esenwine said, noting that insurers generally focus on long-term corporate bonds. "They really are looking at long-duration corporates to match your liabilities."

She noted that smaller insurance companies might benefit because taking securities is faster than taking a large amount of cash and then investing it.