Why PRT Deals Are Important For Annuities
News of developments in the pension risk transfer (PRT) market may draw scant interest from annuity professionals, especially those in the retail market. Let’s revisit that.
The reason for scant interest may be a simple matter of focus. By definition, PRTs shift some or all of an employer’s pension obligations to a third party such as an insurance company. This may cause individual, non-qualified and retail annuity specialists to view the deals as being “corporate” or “benefits” matters beyond their scope and available time.
That’s rational but it may not be strategic. Here’s why. Although many of the deals involve transfer of administrative and related services, other deals involve transfer of longevity risks to group annuities. In fact, many of the mega-deals in PRTs involve purchase of group annuities.
This puts a kind of glow around the annuity word and around the concept of using annuities for guaranteed retirement income.
That glow comes with a nice complement of trust. This is the trust that the employer has placed in the carrier selected for the PRT program and in the group annuity that’s being used to fulfill the employer’s pension obligations. Trust like that is hard to ignore.
What brings all this to mind is the news that Prudential has signed yet another big PRT agreement. The insurance company will take over $1.4 billion in U.S. pension obligations of Bristol-Myers Squibb, which will purchase a group annuity from Prudential for that purpose. The deal will cover pension obligations for approximately 8,000 U.S. retirees and their beneficiaries, with no change in their current monthly retirement benefit payments.
The agreement comes on the heels of September’s news that Prudential will be assuming $3.1 billion in pension obligations of Motorola Solutions, also via a group annuity and also with no change in the affected retirees’ benefits. Prudential was also the group annuity provider for the highly publicized PRT deals in 2012 involving $25 billion in pension obligations at General Motors and approximately $8 billion in pension obligations at Verizon.
Prepare for more of the same. First of all, other carriers are in the PRT market too. Second, PRT transactions are gaining favor among plan sponsors because they ensure benefit payments while also reducing longevity risk and helping manage plan maintenance costs. In February, analysts at A.M. Best said they foresee potential growth in this market over the next decade.
In no way, shape or form are group annuities and PRT deals in the same marketplace as individual, non-qualified and retail market annuities. The PRTs are subject to rules of the federal Employee Retirement Income Security Act (ERISA) and to terms and conditions agreed upon by a wide assortment of business and vested interests. The individual/retail annuities are subject to state regulation (and in the case of variable annuities, also federal authorities), and to provisions in an individual policy offered by a carrier, often with the assistance of an advisor, and agreed to by a consumer. The PRTs can involve up to billions of dollars in collective pension obligations while an individual/retail annuity can involve anywhere from a few thousand dollars to upwards of a million dollars of premiums paid by an individual policyowner.
Still, PRT deals get a lot of publicity in the consumer media, often because the outcome affects so many retirees. The news reports typically mention that the employer has purchased a group annuity, and that the annuity will continue the benefit payments as before. Those mentions add up. The annuity word gets passed around, typically in a positive light.
Since annuity professionals stand to benefit from that light, keeping tabs on PRT developments seems like a pretty smart thing for them to do. If the PRT subject comes up in conversation, the professional will be in an ideal position to provide contextual insight on the role of annuities and the guaranteed income stream they provide.
This is in addition to the salutary benefits that professionals get from becoming informed about industry issues and trends beyond their specialties.