PLANADVISER - July/August 2019 - 45

Following a partial PRT, the sponsor may have to add cash
to the plan if its funding falls below 80%, Cadenhead says.
Provisions of the Pension Protection Act of 2006 (PPA) impose
benefit restrictions on plans that are less than 80% funded,
with increased restrictions on those less than 60% funded.
" What we've found in talking to many CFOs [chief financial
officers] is they are willing to pay a little extra to give
them certainty rather than volatility, " he says. " When they
look at their liability versus the present value of future
expenses for retirees, it ends up being a wash. "
Both Cadenhead and Unhoch agree that the decision to
implement a PRT depends on the unique circumstances of
the plan sponsor.
When Is a Plan Ready?
If a defined benefit plan is at the 80% minimum funded
threshold or higher, its adviser can look at several factors to
gauge whether the plan is ready for a PRT transaction.
The most obvious factor is whether the plan has been
frozen. " In that situation, it's a question of when, not if, the
plan sponsor will transfer risk. Most sponsors of frozen
plans don't intend to hold onto the plans forever, especially
with increases in PBGC [Pension Benefit Guaranty Corporation]
premiums, " Cadenhead says.
This leads to the consideration of expenses for maintaining
the plan. Unhoch says PBGC premiums are the
biggest expense for a DB plan sponsor. The per-participant
flat premium rate for plan years beginning in 2019 is $80
per participant for single-employer DB plans; the variablerate
premium is $43 per $1,000 of unfunded vested benefits,
capped at $541 times the number of participants. " If a plan
sponsor is at the PBGC cap, for every participant taken out
of the plan, that would save the plan sponsor $621-$80 for
the flat premium rate and $541 for the variable premium
rate, " he notes.
According to Cadenhead, if a plan has many participants
with small benefits, considering the cost of PBGC premiums,
its sponsor may be advised to offer a lump sum or do a
partial transfer to an annuity for those participants.
Advisers should also look at the plan's liabilities in relation
to the market capitalization of the company, Unhoch
says. At the time General Motors transferred its pension
risk, the liabilities were larger than the market capitalization
of the company, he observes.
Further, advisers should help the client calculate the
expense of a PRT. The cost to purchase an annuity will
depend on the plan's funded level. " If the plan is well-funded
it's easier, but, for those that are not, they'll have to come up
with considerable cash, " Cadenhead says. " Even if a sponsor
is doing a partial risk transfer, it will want to consider
whether it has enough money to make that happen. "
Cadenhead adds that insurers are most competitive for
retiree liabilities-these people have shorter life spans than
those still employed, and the insurer already knows the
amount of benefits to be paid. Plan sponsors can get the best
pricing on a partial risk transfer of retirees. For terminated,
vested or active participants, there is more uncertainty for
GETTING INTO THE PRT GAME
If an adviser serves a plan sponsor's defined contribution (DC)
plan, he may see an opportunity to help the sponsor gauge
whether pension risk transfer (PRT) is right for its defined benefit
(DB) plan.
Mark Unhoch, with October Three Annuity Services, suggests
asking these simple questions, to open the door to that
opportunity:
* Have you looked at options regarding your DB plan?
* What are your goals regarding the DB plan?
* Are you happy with the investments or expenses
of your DB plan?
Once advisers know the answers to these questions, they
will understand how to go about advising the client about
its plan, Unhoch says. -RM
the insurer, so the price charged may be higher.
According to Cadenhead, in some cases, plans may have
complicated features, and the sponsor will be unable to find
an insurer to assume the liabilities. Three such examples
would be:
* A plan offers retiring participants the greater of a traditional
annuity benefit or a cash balance benefit; which is
greater may depend on the interest rate environment at the
time and the age at which the person retires.
* A plan offers a choice between a fixed annuity and
an annuity that begins paying at a lower amount but is
adjusted for inflation each year, making its future cash
flows more unpredictable.
* Once a cash balance plan is terminated, the interest
credit rate and the annuity conversion rate are fixed-
helpful from an administrative perspective, but it may be
difficult to invest to match the expected payout.
For plan sponsors that offer the better of cash balance
or traditional DB plan benefits, it is unclear which benefit
will be more valuable when someone retires, so the insurer
needs to consider both alternatives and will price for the
more expensive one.
Advisers
should also make sure DB plan sponsors
understand the potential hits to their balance sheet from
a PRT. Besides the impact from adding cash to purchase an
annuity, DB plan sponsors may, because of accounting rules,
have unrecognized losses on their balance sheet that are
amortized over time. But, Cadenhead says, when an annuity
purchase or large lump-sum payments trigger settlement
accounting, the sponsor will have to recognize a portion of
those losses all at once. " That can be fairly large for some
plans, " he says.
Advisers might also suggest annuity purchases to lock
in funded status gains, Unhoch says. DB plans often use
liability-driven investing (LDI), which moves assets to less
risky investments, typically bonds, at certain funded status
triggers. -Rebecca Moore
planadviser.com July-August 2019 | 45
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