Defined benefit pension plans are great programs to help your employees create a guaranteed income for their retirement years. But they are expensive…very expensive. If your company still sponsors a defined benefit (DB) pension plan, today’s financial, regulatory, and demographic realities make it increasingly important to reevaluate how the plan is managed—and what risks it may continue to present to the organization. One strategy that has gained traction in recent years is a Pension Risk Transfer (PRT). But what exactly is it, and why should your organization consider it?
What Is a Pension Risk Transfer?
Pension Risk Transfer is a process by which an employer reduces or eliminates its DB plan liabilities by transferring some or all of those obligations to a third party—typically an insurance company. This can be done through:
- Lump-sum buyouts: Offering terminated, but not yet retired plan participants a one-time payment in lieu of future pension payments.
- Group annuity purchases: Transferring liabilities to an insurer who assumes responsibility for making future benefit payments.
This strategy can be used by any sponsoring employer, whether your plan is active, frozen or ready for termination.
Why Consider a Pension Risk Transfer?
Here are the key reasons sponsors are increasingly turning to PRT strategies:
1. Reduce Balance Sheet Volatility
Defined benefit plans introduce significant volatility into an organization’s financial statements. Fluctuations in interest rates, market performance, and longevity assumptions can cause large swings in the plan’s funded status. By transferring liabilities to an insurer, you reduce exposure to these risks, leading to more predictable financial reporting.
2. Cut Administrative and Compliance Burdens
DB plans come with ongoing administrative responsibilities, like actuarial valuations, annual audits, PBGC premiums, participant communications, and more. A pension risk transfer can significantly reduce or even eliminate these burdens, freeing internal resources to focus on core business operations.
3. Minimize Long-Term Costs
Maintaining a DB plan can be expensive, especially for frozen plans with aging populations. Rising PBGC premiums, increasing longevity of retirees, and low interest rates all drive up long-term costs. Transferring liabilities now can lock in current pricing and potentially reduce overall plan costs.
4. Align with De-Risking Objectives
Many plan sponsors have already frozen benefit accruals and adopted liability-driven investing (LDI) strategies. A Pension Risk Transfer is often the logical next step in a de-risking journey—one that allows the company to fully or partially offload pension obligations in line with its long-term financial and workforce goals.
5. Enhance Corporate Transactions and Strategic Flexibility
Pension liabilities can complicate mergers, acquisitions, and other strategic corporate initiatives. By reducing or eliminating these obligations, a PRT strategy can help “clean up” the balance sheet and make the organization more attractive to potential investors or acquirers.
6. Protect Participants Through Insurance Guarantees
In a group annuity purchase, retirees continue to receive their promised benefits, but from a financially strong, regulated insurance company. In many cases, this can offer participants greater benefit security through state insurance guaranty associations than would be available through the PBGC alone.
Is Now the Right Time?
Whether your plan is active, frozen or terminating, now may be the time to conduct a pension risk transfer. Market conditions, interest rates, and insurer capacity all influence the cost and timing of pension risk transfer solutions. While every plan is different, many employers find that acting sooner—particularly while interest rates are relatively stable and funding levels are strong—can lead to better pricing and outcomes.
Final Thoughts
Defined benefit plans have served their purpose, but for many employers, the risk and cost of maintaining them now outweigh the benefits. Pension Risk Transfer strategies offer a path to reduce financial uncertainty, simplify plan administration, and ultimately protect both the company and its retirees. If your organization hasn’t yet explored a PRT solution, now may be the time to start the conversation.
Want to see if a Pension Risk Transfer is right for your Pension Plan?
We run custom illustrations for employers who are serious about pension plan risk mitigation and plan termination. If you’re wondering whether a pension risk transfer could work for your organization, reach out to us and let us conduct a study for you.
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office.
The post Pension Risk Transfers – How to get out of from under your defined benefit plan financial liabilities once and for all. appeared first on Prime Capital Financial.
