DB plans with tens of billions in assets are waiting to transfer the risk to third-party insurance companies when interest rates rise, according to a report by P&I.
De-risking has been light this year: Only $1 billion of deals were done, compared with $37 billion in 2012, a year that included plans like GM and Verizon. Prudential, one of two big players in the pension de-risking market, expects $150 billion of deals in the next five years; MetLife, the other one, estimates $20 billion annually for the next 10 years. And some international companies are seriously eyeing the U.S. DB market.
Buoyed by the rising stock market, funding of DB plans is increasing. This puts corporate sponsors in a better position to transfer the risk rather than manage it themselves. Deals can take 12-14 months, so the rush will take a while to start.
There are concerns, however. DB plans managed by third-party insurance companies don’t enjoy the protection of the PBCG — although a suit by Verizon pensioners on this issue was thrown out this summer. And while Pru and MetLife are large, well-established insurance companies, there’s no guarantee that even the biggest insurance companies will not fail, as we saw during the Great Recession.
Though much of the current de-risking activity involves DB plans over $1 billion, activity could spread to smaller plans — which would leave the role of the advisor unclear, never mind the future of DB plans in general.
