What Happened:

A large multiemployer pension fund paid an insurance company $221M to have the insurance company take full responsibility for all future pension payments for a portion of its current retiree group. All told the plan shifted 8,700 retirees and beneficiaries (just under 50% of the total retiree group) from the plan to the insurance company. The transaction reduced plan assets by about 9%. The Plan and its Trustees will no longer have any responsibility for the pension benefits of these plan members or for the payment of their benefits.

Background:

These types of transactions are common in single-employer pension plans and until now nonexistent in the multiemployer space. Historically, the drivers for the transactions have been reducing the plan sponsor’s exposure to investment risk, and reducing the level of administrative cost (especially reducing PBGC premiums that range from $100 to $800 per person for single-employer plans). Multiemployer Trustees have traditionally been more connected to their retirees than private employers and thus reluctant to engage in these types of transactions. For example, it is much more difficult to give cost of living increases to retirees who have had their annuity purchased by an insurance company. A second barrier for multiemployer plans has been the cost differential between the projected cost of financing the benefits within the plan using a more growth-oriented investment strategy versus the price the insurance company would require to take over the future benefit payments. Recently higher interest rates have reduced this cost impact.

Why It Happened:

There are likely multiple reasons for this Fund to make this transaction at this time. Some are unique to the particular Fund and some may be more applicable to multiemployer funds in general. At the time of the transaction, the following drivers were cited:

1. Benefit security. Retirees’ future benefit payments are now backed by a larger financially secure entity. The insurance industry is highly regulated in the United States, and no lifetime annuities like the ones purchased have ever been defaulted on.
2. Improved net cashflows to the plan going forward. The fund investments will not need to be liquidated to the extent before the transaction so longer-term, less liquid investments with possibly higher returns can be considered.
3. Factoring in the value of administrative costs narrows the difference between the insurance annuity purchase price and the plan’s liability. In selecting the benefits to be annuitized, a common strategy is to start with the smallest dollar amounts, this brings the best return in terms of administrative savings.

What Trustees Should Expect or Think About:

To annuity brokers and insurance companies who make money from these transactions there is certainly the hope that this opens the door to a brand-new market and there will no doubt be many sales calls citing this “new era”. Fund Trustees should consider:

1. How significant a proportion of the plan is made up of the current retirees? The larger the retiree portion, the more attractive the purchase. Alternatively, there may be smaller segments of the retiree population that could be settled, such as those with small benefits, a long time since retirement, or surviving beneficiaries.
2. Does the plan have a history of post-retirement cost of living adjustments? Awarding these types of increases, including 13th checks, can be trickier once they are annuitized.
3. What is the level of administrative costs, including PBGC premiums, and how sensitive is that cost to the size of the group? If expenses are relatively static regardless of headcount, this type of transaction may not add a lot of value.
4. How well-funded is the plan? The transaction will likely reduce the funded percentage of the plan so Green Zone plans would make good candidates.

We recommend Trustees prepare their funds by analyzing their situation prior to being approached by an annuity broker. The Fund’s attorney and actuary can help educate the Trustees, evaluate possible strategies to transfer risk from the plan, and put Trustees in a better position to make the best decision for their Fund. Contact a Bolton consultant today to discuss these strategies to transfer risk from your plan.