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Pension Risk Transfer Explained

As an employer, you may be proud to offer your employees defined-benefit pension plans that put them at ease and help them plan for their future. A pension plan can offer many benefits to your employees, such as guaranteed payments in retirement, tax deferments on contributions, and professional management of their investments.

What risk is associated with pension plans?

To understand the importance of pension risk transfer, you must first understand the meaning of pension risk. There are several factors that can pose risk related to pension plans.

Longevity is a key risk when it comes to pension plans. If pension plan members live longer than expected, pension payouts will be higher than budgeted, posing financial risk to your company.

There is also considerable risk associated with investment. The funds set aside for pension payouts are invested by financial professionals with a goal to grow the funds. If funds are improperly invested or the economic climate changes for the worse, the providing institution could be short on funds.

Fluctuating interest rates can also pose risk to pension plans. This risk can lead to increased pension liability, meaning the providing institution is left with far less in assets budgeted to make pension payments than the amount owed to retirees.

All of these factors and more can impact the overall financial risk a pension plan might pose to a pension providing institution.

Pension risk transfer definition

Pension risk transfer is, as the name suggests, a way for institutions providing pensions to transfer the risk associated with pension plans. According to Investopedia:

“A pension risk transfer occurs when a defined benefit pension provider offloads some or all of the plan’s risk (e.g., retirement income liabilities to former employee beneficiaries). The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan early (buying out employees’ pensions) or by negotiating with an insurance company to take on the responsibility for paying those guaranteed benefits.”

Purchasing annuities

One popular method of transferring pension risk is for the pension plan providing institution to purchase annuities. Group annuities can be purchased from life insurance companies that offer pension annuity products. By purchasing annuities, the institution is transferring the pension risk to the insurance company.

Lump sums

Pension buy-outs can enable you to give your plan members what they are owed for retirement up to this point, and eliminate pension risk going forward.

Restructuring pension plans

Another option is to restructure pension plans to reduce risk. A pension risk transfer professional can use their expertise and insight to restructure your pension plan to mitigate risk. Options also include modifications to contributions, and pension plan freezes.

How we can help

Legal & General Retirement America (LGRA) is here to assist with pension risk transfer solutions to help protect your institution. We can guide you towards the best PRT method for you, to mitigate pension risk and work towards a more secure future for you and your employees. Contact LGRA to learn more or get started with pension risk transfer today.

Check out our Quick Guide to PRT to learn more

About Legal & General Retirement America

Legal & General Retirement America (LGRA) specializes in customized pension risk solutions for institutional clients in the US market. Established in 2015, Legal & General Retirement America is a business unit of Legal & General America, Urbana, MD. Legal & General America life insurance and retirement products are underwritten and issued by Banner Life Insurance Company, Urbana, MD and William Penn Life Insurance Company of New York, Valley Stream, NY. Banner products are distributed in 49 states, the District of Columbia and Puerto Rico. William Penn products are distributed exclusively in New York; Banner does not solicit business there. The Legal & General America companies are part of the worldwide Legal & General Group. 21-104