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The pension risk transfer (PRT) market has expanded significantly over the past decade, hitting record-high volume in 2023. A combination of regulatory changes, rising interest rates, and improved funding statuses were allowing defined benefit (DB) plans to de-risk and pursue PRT transactions.
This was according to the latest “Cerulli Edge—U.S. Institutional Edition”, released in May, which said that asset managers were poised to gain corporate DB assets amid the market conditions caused by inflation and rising interest rates.
Issues with the DB market have been well-publicised in recent years with their lack of growth and utilisation.
The PRT market is showing high amounts of growth on both sides of the Atlantic. In February, Legal & General said that, according to its research, 2023 had seen “record-breaking global PRT market activity”, which totalled over £85 billion in the UK and the US. It was the second-largest year on record in the US.
“The US PRT market has performed strongly now for several consecutive years, with 2023 the second largest year to date."
The US market volume reached an estimated $45 billion in 2023. In the UK, there was around £50 billion secured during the year, which followed a series of transactions with annual volumes in the UK projected to increase to £50-60 billion, from an average of £31 billion in the five years prior to 2023.
“The US PRT market has performed strongly now for several consecutive years, with 2023 the second largest year to date,” said George Palms, President, Legal & General Retirement America (LGRA). “This sustained market strength demonstrates that there is an appetite among plan sponsors for key risk mitigation strategies.”
Palms continued, saying that “as interest rates remain elevated, funding levels will continue to be a driving force behind the growth in the market”, which would encourage more transactions.
Showcasing the strength of the market, one insurer, F&G Annuities and Life, announced earlier this month that it had cumulative sales of PRT transactions of over $5 billion since its channel was launched in June 2021.
In the wider US pension risk transfer market, 30 public companies disclose that they offloaded pension obligations to an insurance company during the year.
The disclosed transactions totalled $16.8 billion in pension obligations transferred, which impacted about 150,000 plan participants or their beneficiaries, according to a review of publicly available documents by S&P Global Market Intelligence.
Cerulli said that despite lacklustre investment returns, corporate DB plans have continued to see an improvement in their funded statuses, allowing many to de-risk and pursue PRT transactions. It meant a changing landscape for investors at insurance firms and the asset managers who advise or manage their portfolios.
“The PRT market has expanded significantly over the last decade, due to regulatory changes coupled with rising interest rates and improved funded statuses,” said the report. “The volume of PRTs is expected to withstand an expected interest rate decrease.”
Due to these factors, many plans now are well funded, which has led some plan sponsors to re-evaluate their managers and re-allocate to risk-averse assets. According to research conducted in Q2 2023, more than two-thirds of plan sponsors (69%) told Cerulli they are at least somewhat likely to de-risk over the next 24 months.
They added that asset management firms that can assist with de-risking efforts, including providing advice on glidepaths, are “well positioned to capture corporate DB assets”.
“Over the last decade, the insurance carrier side of the PRT market has expanded rapidly – meaning the industry now has an increased capacity to handle more transactions,” it said. “Many insurers with a longer PRT transaction history have a competitive advantage over newer entrants due to their ability to handle complex plan designs, enhanced customer service capabilities, and brand recognition and reputation.”
“Asset managers that can assist with de-risking efforts, including providing advice on glidepaths, are well positioned to capture corporate DB assets."
Of the four main strategies used for a PRT – lump-sum payments, annuity buyouts, buy-ins, and longevity swaps – 43% of plan sponsors say they would use a combination of lump-sum payments and annuity buyouts in the case of plan termination.
“Asset managers that can assist with de-risking efforts, including providing advice on glidepaths, are well positioned to capture corporate DB assets,” said Agnes Ugoji, an analyst at Cerulli. “Managers with an asset-liability management strategy can support the shifting priorities for plan sponsors’ funded status gains, ensuring they reach their goals.”
“High-yield managers and alternative managers will be adequately equipped to support these clients,” Ugoji said. “As corporate DB plans represent a diminishing opportunity, asset managers should look toward other institutional channels, particularly insurance general accounts and endowment and foundation clients."
This was similar to the views of Erik Vynckier, Investment Committee Chair, Foresters Friendly Society, who spoke to Insurance Investor earlier this year and said one of his most watched trends in assets of 2024 was “Basel III telling banks to stop lending in the same way that Solvency II tells insurers to stop insuring”.
“Banks are in the market for offloading loan risk and loan capital through significant risk transfers to more willing investors in such risk,” he said.
However, as interest rates remain steady or potentially decrease, Cerulli said it expected that pensions would struggle to maintain highly funded statuses.
This week, Ben Broadbent, the Bank of England (BoE) deputy, was quoted saying the direct impact of Covid and the war in Ukraine on inflation had “faded”, and the BoE was waiting for longer-term effects to decline.
Last week, a poll by Reuters predicted the US Federal Reserve would cut its key interest rate twice this year, starting in September. This was according to a stronger majority of economists, who said Reuters had “broadly raised their inflation forecasts for a second consecutive month”.
This was on the back of inflation data, which showed the pace of price increases in the US displayed signs of slowing in April, after “a streak of higher-than-expected inflation data had stoked concerns”.
Consumer prices rose 3.4% in the 12 months to April, down from 3.5% for the month before, according to the US Department of Labor.
Over the last decade, the insurance carrier side of the PRT market has expanded rapidly – from ten active insurers to 21 today, according to Cerulli’s research. “The ramifications of this expansion mean the industry now has an increased capacity to handle more transactions,” it said. “Expansion also has had a significant impact on price. While plan sponsors are obligated to choose the safest annuity provider, it is clear that insurers must compete on several factors to win the deal.”
“Greater clarity from the Department of Labor and more new entrants could add new layers to an evolving competitive dynamic."
They added that new entrants to the space will have to often compete on price. However, as regulation on the market continues to develop, it said that “greater clarity from the Department of Labor and more new entrants could add new layers to an evolving competitive dynamic”.
This will happen as the market cycle continues and it becomes increasingly likely we will see interest rate cuts in H2 2024.
