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Pension Risk Transfers: Technology Implications of Current Market Activity

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20 October 2021
Karen Monks


The booming stock market is growing the money in company pension plans. It could be the right time to sell if a company wants to remove the pension responsibility from its balance sheets. This is known as a pension risk transfer, or PRT. In a PRT, a company can buy an annuity and transfer the assets of the pension plan and the responsibility for paying for it to the insurance company offering the group annuity. The insurer makes money if it earns more from investing the assets than it has to pay out. PRT deals are very attractive right now because investment returns are good and can save the employer from having to pay any shortfall in the balance when it buys an annuity. The other side of a good market is an overfunded pension which could result in the employer sponsors having a tax bill. So PRT decisions seem to be picking up because of the current timing of the market.

Two prominent annuity providers, Athene and Prudential made large deals this year and Willis Towers Watson expects more than $30 billion worth of transactions, which could make 2021 the busiest year since 2012. A pension annuity is good for a life insurer because it can balance the obligations against other products in its portfolio. The insurer can hedge the risk of people living longer than expected (and having to make pension payments) against that of customers dying too soon (and having to pay a claim at death). But insurers aren’t the only ones buying the pensions. Private equity firms are buying annuity insurers to provide them with long-term capital it can invest and earn fees.

A MetLife study found that 93% of 250 pension sponsors surveyed intend to divest all of their obligations, up from 76% in 2019. Not all will divest their entire plan, but some will. According to Yanela Frias, president of Prudential’s group insurance business, “an insurance company is better positioned to manage this liability than a car manufacturer or a telephone company” since they do it for regularly. Today 19 life insurers are in the PRT market; more are expected to enter says Mercer (part of Celent’s parent company, MarshMcLennan), a benefits consultancy and brokerage. That has implications for the future technology needs of these insurers and the private equity firms that are buying them.

In order to manage these group annuities, insurers need high quality, consistent data to support the annuity administration lifecycle and the customer/plan sponsors’ experience. To be a plan administrator for PRT, insurers must have the ability to collect census data on the group, provide quotes for the future benefits, regularly communicate fund performance and balances, payout the proceeds, and follow regulatory rules to name a few requirements. Options for insurers who are not currently administering PRT are to modify their current systems, buy a modern policy administration system with PRT features, or to outsource to a partner that administers the PRT type of group annuities. The right strategy is not always apparent. Regardless if the annuity in administered in house or with an outsourcer, systems or partnerships must provide the plan sponsor and employee the guarantee that nothing will change with the timing and amount of the pension payments and contributions

More policy administration software vendors are providing the ability to administer PRT annuities, but the options are not abundant. The insurers must have web-based connectivity to plan sponsors and participants. They must offer dashboards, analytics, workflow management, document and correspondence management, and campaign management via extensive API-integration. In short, the PRT must be handled by a system that is fully capable of group processing and fund administration. It requires a system with intuitive user interfaces, intelligence, and analytics to a provide the best customer experience possible.Employees expect an ‘investment firm experience’ and the insurer must be able to duplicate that experience.

Celent has relevant experience in helping insurers create a strategy and choose their technology path for PRT and other group annuities. Ask us about it!



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Life & Health Insurance
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North America