The majority of finance chiefs are in favour of transferring pension risk to an insurer due to the increasing costs and volatility of managing defined benefit pension plans, Prudential Financial has revealed.

According to a survey involving 80 senior finance executives conducted by CFO Research in cooperation with Prudential Financial, the group of finance executives that offloaded their pension risk to an insurer had three primary concerns about costs and volatility that encouraged their decision.

The three reasons include: persistent asset-related volatility, often as a result of low interest rates, sharply increasing premiums to the Pension Benefit Guaranty Corp., which insures corporate pensions against default and growing life expectancies of beneficiaries, which leads to an increased payout.

Among all senior executives, 36 per cent cited that the growing PBGC premiums make it more them more likely to purchase a group annuity in the near term. A further 33 per cent of respondents explained that recent mortality changes and the prospect of future changes make it much more likely that their companies will consider a pension risk transfer.

As a result of these, a growing number of companies are opting for group annuity purchases to transfer pension liabilities to insurers, the research noted.

Of the finance chiefs who have already transferred their pension risk, 72 per cent said they are likely to transfer additional liabilities in coming years.

Eighty-three per cent of survey respondents said they are “completely satisfied with all aspects” of the group annuity transactions, while 81 per cent agreed that their beneficiaries are fine with receiving their pension checks from an insurer. A total of 86 per cent also agreed that this agreement helps their company to keep promises made to employees and retirees.

Of those who have not yet transferred, 21 per cent stated that they plan to purchase a group annuity in the next two years.

Furthermore, over half, 55 per cent of respondents agreed that lowering the corporate tax rate would make it “very likely” for their companies to increase pension plan funding, commonly prior to purchasing a group annuity, in the next year. Forty per cent agreed that lower taxes would lead them to embark on a full or partial pension liability transfer.

Prudential Retirement head of pension risk transfer Scott Kaplan explained: “Senior finance leaders are very much aware ¬¬– as this survey makes clear – of the pain points that DB pensions can create for well-run companies. But these executives are equally mindful of how pension risk transfer can lessen the increasing costs and volatility that pension plans can create for a company’s finances. These agreements enable companies to concentrate on what they do best, while fulfilling their sacrosanct promise to employees and retirees.

“This survey shows how important the topics of interest rates, tax policy and longevity—and their interactions—are for the future of companies that offer traditional pension plans. Such issues are clearly top of mind among finance executives who are responsible for fulfilling pension promises.”

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