Among the many trends seen in the pension plan arena over the past several years is the continued annuitization of defined benefit plans. Large and small companies continue to investigate strategies to lower their pension liabilities and shift the obligations from the sponsoring company to an insurance company.
Annuitization, or de-risking, is the concept of purchasing group annuities from an insurance company, with the insurance company assuming the obligation of paying the retirement payments owed to participants under the plan. The insurance company is taking over the existing payment of the retirement benefit obligations; the retiree sees no change. They continue receiving their benefits as if nothing has happened. It is, however, a significant change to the company sponsoring the plan. The purchase of annuities from the insurance company shifts both the market and the longevity risk from the company to the insurance provider. Since the market has been extremely volatile for the past several years, interest rates have remained low, and speculations are, for the most part, uncertain. Shifting market risk to an insurance company can be a relief to the sponsoring company. The shifting of longevity risk is significant since, in many cases, defined benefit plans were established a number of years ago when life expectancy was considerably shorter than it is now. Companies sponsoring these plans are finding they are paying benefits to retirees for many more years than they did in the past and many more years than they had originally planned for when the plan was established.
It is expected that de-risking and the purchase of these annuities will increase significantly in the next several years as companies continue to transfer pension liabilities to insurance companies. It is less costly than plan termination, will greatly reduce pension liabilities on the sponsoring companies’ financial statements, and greatly reduce the volatility of pension payments each year as they struggle to meet the required minimum payments to meet funding requirements regulated by the Pension Reform Act.