A closer look at pension risk transfers
In a recent trend, companies with pension obligations such as defined benefit schemes are transferring their risks to an insurance company. These companies transfer the assets and pay a premium depending on the funding status of their pension plan. The funding status indicates whether the pension fund’s assets are sufficient to cover the pension obligations.
The funding status of a pension plan depends on the financial market conditions. With a rising equity market, the funding status of several pension plans has improved. This provides an incentive for companies to strike a better deal with life insurance companies and transfer the pension obligations.
Life insurance companies are well positioned to manage such liabilities through their internal asset management divisions, as the nature of the insurance business involves managing assets to meet long-term obligations. Many life insurance companies are held in financial sector ETFs like the Financial Select Sector SPDR ETF (XLF).
Prudential’s position in the market
Prudential (PRU) is the leading player in the pension risk transfer market, having undertaken some large deals in the recent past. For example, in November 2012, General Motors (GM) entered into a deal with Prudential for transferring its pension liabilities to the insurance company. The size of the pension liabilities and the assets transferred exceeded $25 billion. Prudential also had similar deals with Verizon (VZ) and Motorola. Prudential’s competitors in this market include MetLife (MET) and AIG (AIG).
While the business growth in this market remains uneven given the nature of the deals, Prudential had mentioned a strong pipeline of deals. In 4Q14, Prudential saw pension risk transfer transactions worth $4.6 billion, with over $37 billion in 2014 in total buyout and longevity account values.