Art by Simone Virgini
As 2025 began, it was on pace to be another robust year for pension risk transfers, in which plan sponsors move a portion or all of their defined benefit plan liabilities to an annuity arrangement at an insurer. According to the Life Insurance Marketing and Research Association, PRT volume topped $50 billion in 2024, and total dollar volume for both buyout and buy-in transactions was $51.8 billion, up 14% from 2023 and just shy of 2022’s record $51.9 billion.
However, recent market volatility, coupled with split decisions on a wave of PRT-related court cases, are making plan sponsors reconsider the pros and cons of these deals.
Higher interest rates typically help to improve the funded status of defined benefit plans and can reduce the cost of annuity purchases, both of which help plan sponsors move faster on PRT transactions. Insurance companies require full funding for all groups of plan participants that are included in a transfer.
Market uncertainty muddles timelines
The funded status of many DB plans rose in 2024 to their highest levels in years. Higher interest rates and positive returns on equities helped to improve the funding in plans that were not quite fully funded and to support those that were. Those higher interest rates can also reduce the cost of annuity purchases, potentially helping plan sponsors move faster to complete PRT transactions. Insurance companies require full funding for all groups of plan participants included in a transfer.
As a result of the high funded levels, there was a pipeline of potential PRT transactions building in early 2025. That all changed, however, when market volatility increased significantly in February and March.
The problem was most acute for plans that were exactly at the funded status they needed to do a PRT transaction, but did not have much margin for error. Mark Unhoch, the PRT practice leader at consultant October Three, had multiple clients that decided to temporarily put off their transactions to ensure that they would be able to maintain their funded status.
Markets rebounded when President Donald Trump announced a 90-day pause on his planned tariff policy for countries other than China, and Unhoch’s clients are examining what they might be able to do in that 90-day window. As for so many, forecasting remains a significant challenge, according to Unhoch and Scott Hawkins, head of insurance research at Conning Asset Management.
“It’s hard to make assumptions about asset values right now,” Hawkins says. “Say the Fed[eral] Reserve raises rates to fight inflation. That’s going to be a positive for plans. But the flip side of that is if the Fed thinks inflation is under control and they are more concerned about a slowing economy, they could reduce rates, which would lower the discount rate for defined benefit plans, which would increase liabilities at a time when markets are volatile. That makes it challenging for both plan sponsors and insurers that have to quote a price for the transaction.”
That said, some sources say that plan sponsors can realize cost savings and improve their balance sheets by maintaining an investment strategy—if the conditions are right.
“Pensions that are out-earning their liabilities are actually a positive asset on the balance sheet. The issue is investors don’t necessarily care about that,” says Jared Gross, head of institutional portfolio strategy at J.P. Morgan Asset Management. “If you’re a corporate pension for an automaker, [shareholders] want to see you making cars, not out-earning your pension liabilities. However, if you are overfunded, that gives plan sponsors more options in terms of how they approach managing those liabilities into the future.”
Litigation Risk Raises Concerns
Plan sponsors have the right to conduct a risk transfer deal—that’s settled law. But numerous lawsuits filed in 2024 raised questions about how plan sponsors choose insurers for these transactions and whether current due diligence standards are robust enough to ensure that insurers will remain solvent and benefits intact. Courts have so far been split on these cases. Among those decided, one was dismissed and another is moving forward.
Defined benefit plans pay premiums to the Pension Benefit Guaranty Corporation to ensure that benefits will be paid out if something happens to the plan sponsor. With a PRT deal, all of the risk goes to a third-party insurer.
Zorast Wadia, a principal in and consulting actuary at Milliman, says it is important to note that even if there was some kind of challenge to an insurers’ solvency, each state has a state guaranty association which would step in to provide the benefit. However, that system has not been heavily tested.
“From a practitioner’s perspective, I wouldn’t say you’re necessarily increasing the risk to participants by doing a risk transfer. The balance sheets of insurers are strong,” he says. “But whenever we see litigation, it can lead to a perception that these deals are higher risk. Participant groups pay attention to these cases. Plan sponsors pay attention to these cases. They can make everyone uncomfortable, especially right now when we don’t yet know how the court is going to rule.”
An Evolving Landscape
Even if macroeconomic uncertainty keeps plan sponsors on the sidelines temporarily, it is unlikely to keep them there forever. Pension risk transfers can help improve the balance sheets of companies by taking some funding volatility risk off the books and, if they choose not to transfer the entire plan, can also improve the asset values for the participants that remain. Plan sponsors also have to pay PBGC premiums on all liabilities they hold, which often includes a number of small-dollar accounts from people who have left the company. These accounts are frequently the first tranche of participants that go in a PRT deal, because it is more cost-effective to turn those accounts into an annuity rather than keep paying full premiums for non-active, small-balance participants.
Gross adds that depending on how overfunded a plan is, a company can use that surplus to potentially reopen the plan or provide a new benefit to participants. If a plan structure allows it, plan sponsors can take back the cash match on the 401(k) plan and offer a defined benefit that is subsidized by the surplus. This means plan sponsors can remove an ongoing operating expense (the cash match) from their balance sheets without cutting the overall benefit available to participants.
“I think plan sponsors are taking a step back and realizing that they went through the exercise of heavily de-risking their portfolios from an investment perspective when we saw a lot of volatility in defined benefit plans [more than] 15 years ago,” Gross says. “Now they have something that’s performing well and is already fairly conservatively positioned. So the question becomes: Is it really necessary to now go through with a large-scale risk transfer if you’re not going to get rid of the whole plan? It might not be.”
Sources say they expect pension risk transfers to evolve and become one tool of many available to plan sponsors. For example, a plan sponsor might opt to only move the small-dollar, inactive participant accounts in a risk transfer, realize those cost savings, and then keep the remaining participants in a fully funded plan. IBM is a recent example. The corporate plan moved some tranches of participants and then opted to reopen the company’s cash balance defined benefit plan.
Matt McDaniel, a partner at Mercer and its U.S. pensions strategy and solutions leader, says that this trend is indicative of a relatively strong PRT market.
“All things being equal, there is still a lot of demand for risk transfer deals from both plan sponsors and insurers because it is a cost-effective way to manage liabilities,” McDaniel says. “That said, we are seeing both sides come together and say, ‘OK, what are the best solutions here?’ That is likely to lead to more innovation in the future and more options for both plan sponsors and participants in terms of plan design and lifetime income solutions.”
Tags: Conning Asset Management, Corporate pension funding, J.P. Morgan Asset Management, Jared Gross, Mark Unhoch, Matt McDaniel, Mercer, Milliman, October Three Consulting, Pension Risk Transfer, Scott Hawkins, Zorast Wadia