‘Tis the season for pension buy-outs

Group pension buy-outs are usually seasonal, with the most activity happening in the fourth quarter, but industry analysts are seeing a trend toward more sales throughout the year.

Sales of group pension buy-outs reached a record high in the second quarter, jumping 700% from the second quarter of 2014. Pension buy-out sales were $3.8 billion, the highest sales recorded in the second quarter going back to the early 1990s, according to the LIMRA Secure Retirement Institute.

“We’ve seen a big increase in small- and medium-sized companies that are looking to convert their pensions,” said Michael Ericson, research analyst for LIMRA Secure Retirement Institute. “As a result, there is much more activity throughout the year, not just the fourth quarter.”

Also see: Don’t buy out, buy in: Buy-in offers new way to manage DB risk

Pension costs have hurt many companies’ bottom lines in the past few years as interest rates have stayed low and the Pension Benefit Guarantee Corporation premiums have continued to rise. More companies are considering transferring that risk to an insurer by buying a group annuity, LIMRA said. Currently, 11 financial services companies provide group annuity contracts for this market.

Usually, pension buy-outs are seasonal, with most of this type of activity happening in the fourth quarter. Sales increased year over year due in large part to Kimberly-Clark’s group annuity conversion that was announced in February and took effect in June, LIMRA said.

Also see: Kimberly-Clark offloading $2.5 billion in pension liabilities

In the first half of the year, 107 plan sponsors converted their defined benefit pension plans into group annuity contracts. The previous record was 95 contracts in the first half of 2012.

But the number of contracts only tells part of the story, LIMRA said. In 2012, General Motors and Verizon transferred their group pension obligations to Prudential. Those two contracts alone were worth $35.9 billion. “While two deals that big occurring in one year is an anomaly, a single ‘jumbo’ deal can have a significant impact on annual pension buy-out sales,” LIMRA found.

“Even without jumbo deals, there are just more plan sponsors looking to convert their pensions to group annuities,” said Ericson. “All this activity suggests that 2015 will be another strong year for pension buy-outs.”

Also see: Plan sponsors concerned about PBGC premiums

LIMRA Secure Retirement Institute administers the Group Annuity Risk Transfer Survey every quarter. 

Paula Aven Gladych is a freelance writer based in Denver.