Employer-funded pensions, known as defined-benefit pension plans, have long been on the decline. By taking on employer pension liabilities through pension-risk transfer, insurers are bringing value to companies and individuals and realizing important growth opportunities for their businesses.
At The Geneva Association's 16th Global Ageing Conference, Amy Kessler, Senior Vice President & Head of Longevity Insurance at Prudential Retirement, spoke to Geneva Association Collaborating Expert Ronald Klein about how pension-risk transfer is an opportunity for insurers to promote people's financial well-being leading up to and during their retirement years.
Ronald Klein: Thanks for speaking with us today, Amy. Can you first talk a little bit about where defined-benefit plans and defined-contribution plans are going, from a U.S. perspective and also a global one?
Amy Kessler: Absolutely. Over the last 20 or 30 years, we’ve seen a massive secular shift out of defined-benefit plans for people to plan and save for retirement, over to defined-contribution plans. And the defined-benefit plan is, ‘I’m with my employer for 30 years, they’ve been saving for my retirement, I retire, I get my gold watch and my monthly benefit for as long as I live, no matter what happens to the assets.’
Ronald Klein: Who takes the risk for that?
Amy Kessler: Well, the company takes the risk, and they don’t like it. But because people are much less likely today to stay with one employer for a long time, and because people enjoy portability of their retirement savings, and because people fancy themselves to be good investors, and like to watch their pension and retirement balance grow-and-grow, the 401(k) and defined contribution plan is now, and will continue to be, the preferred approach. The vast majority of defined-benefit plans are a thing of the past - closed, frozen, no more accrual of those benefits for people.
Amy Kessler, Senior Vice President & Head of Longevity Insurance, Prudential Retirement
Companies instead are offering a defined-contribution plan where all of the risk has shifted to the individual. They need to know how much to save, they need to know how to invest, they need to know how to figure out when they’ve saved enough money to retire.
Ronald Klein: So we have one problem where the individual has to be the insurance company and know all about the investment. We also have another problem where companies have these closed plans. What is your solution for these closed plans?
Amy Kessler: Well, over 10 years ago we started focusing on the opportunity to help companies manage and transfer the risk of their defined-benefit pension funds into the insurance community. The only way in most countries to transfer and settle a pension liability is to move it to an insurance company, and so back around 2006 or 2007 we identified this massive business opportunity for the insurance community: supporting the companies that have sponsored defined-benefit plans, and helping them to settle the liabilities through what we call pension-risk transfer.
Ronald Klein: I hear the terms ‘buy-in’ and ‘buy-out’. Can you explain the difference between the two terms?
Amy Kessler: Sure.
Let’s start with a buy-out. That’s when the company settles the pension liability. They pay an upfront premium to an insurer that settles the liability. The insurer issues annuity certificates to all the individuals in the pension plan. Those individuals look to the insurer thereafter for their payments. The relationship between the company and the individual has been totally severed, and replaced the obligor on those benefits with the insurance company. That’s a buy-out. It’s the only way to settle a pension liability.
The buy-in is similar, because it covers all the asset risk and all the liability risk. But a buy-in is a group annuity contract that is held as an asset of the plan. It’s literally held inside the pension fund. It’s a group annuity that’s an asset of the plan, but it’s a perfect liability-matching asset, and it will pay as much benefit as.
Session on 'Trends and Perspectives in Managing Post-Retirement Income' at the GA's 16th Global Ageing Conference, hosted by RGA
Ronald Klein: But for you or me, the pension holder, it doesn’t really matter to us, we get our benefits, it’s guaranteed. It’s more the company’s decision to make that.
Amy Kessler: It’s the company’s decision whether to do a buy-out or a buy-in, and that decision usually depends on where the pension plan is. In the United Kingdom, people do a lot of buy-ins, because it’s very difficult from a regulatory perspective to settle the liability. In the United States, people do a lot of buy-outs, because it’s very easy to settle the liability even when you do only a partial de-risking of your plan.
One of the things we just spoke about, one of the most energizing subjects, was the fact that in this secular shift from defined-benefit to defined-contribution, we’ve left people on their own to figure this out. Helping people to achieve financial wellness and retirement security is a massive business opportunity for our industry.
Ten or 12 years ago we were looking at pension-risk transfer and saying, ‘That’s going to be big.’ Today it’s wellness. It’s the opportunity to walk into the white space of all the people who are arriving at retirement unprepared and financially insecure and help them achieve better outcomes. For every person we help, we can dramatically improve the last 30 years of their lives, and build a wonderful, purpose-driven business on the way.
Ronald Klein: Thank you very much for your presentation at the conference and for your time today. I look forward to seeing you at next year’s conference.
Amy Kessler: Thank you.