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PRT Deal Types: Lift-outs vs. Plan Terminations

 

In a Pension Risk Transfer (PRT) transaction, there are different deal type options for plan sponsors considering de-risking solutions. In this blog, we’ll cover the most common types of PRT deals and how a plan sponsor may benefit from each. Plan sponsors should consider their financial needs and the needs of their plan participants when choosing which option is more suitable for their business plan.

Deal types include plan terminations and retiree lift-outs. First, let’s discuss buyouts and buy-ins, both of which determine how plan terminations and lift-outs take shape.

Buyouts and Buy-ins 

Both buyouts and buy-ins involve a plan sponsor purchasing a single premium group annuity contract from an insurer. In a buyout, the insurer takes on the financial and administrative responsibility of a subset or all of a plan’s members while the plan sponsor is relieved of all longevity, investment and operational risk associated with this group.

Under a buy-in, the plan sponsor continues to make payments directly to annuitants but receives reimbursement from the insurance company for the exact amount paid on a recurring basis. Therefore, in a buy-in, the administrative responsibility remains with the plan sponsor, but longevity and investment risk are transferred to the insurance company.

Plan termination

In a plan termination, the insurance company agrees to take over all of the plan sponsor’s pension obligations to participants, and the existing plan is then closed from the plan sponsor’s point of view.

Plan terminations can take 12-18 months to complete, as companies must go through a strict regulatory and government approval process. Plan terminations most often take the form of a buyout, but can also be structured as buy-ins if the plan sponsor wants to take advantage of good insurer pricing available in the current market environment and convert to a buy-out later.

Some reasons why a plan sponsor would want to take the plan termination route is if they:

  • Wish to remove responsibility for ongoing contributions or administrative costs

  • Feel as though employees prefer other types of savings plans

  • Have been acquired by a new company

  • Are financially prepared and have a fully funded plan

Lift-out

Another type of PRT transaction is a lift-out, typically involving retirees and beneficiaries. Lift-outs have recently emerged as a trend in the market and have become the most common type of PRT transaction in the US. Under a lift-out, only a portion of the pension plan’s participants get transferred to an insurance company. Like a plan termination, a lift-out takes shape through either a buy-in or buyout.

Typically, in a retiree only lift-out, the slice of retirees receiving the smallest amount of pension payments is transferred to an insurer. This is an economical way of removing a portion of the pension obligations, while simultaneously eliminating the Pension Benefit Guaranty Corporation (PBGC) premiums associated with each participant covered by the transaction.

Retiree lift-outs can take as little as 3-6 months to complete as they don’t require the same amount of coordination and regulatory approval as plan terminations. It may make sense for a company to take a gradual approach before arriving at a full termination, starting with lifting-out sections of the plan and eventually progressing all the way to full plan termination.

Some reasons why a plan sponsor would want to take the lift-out route is if they:

  • Are looking to test out the market
  • Are not financially ready for a full plan termination
  • Do not wish to terminate the plan in full but want to de-risk and reduce some costs of running the plan

When it comes to pension risk transfer, no one size fits all. Contact us today to learn more about the de-risking solutions we offer to meet your business needs and ensure the financial future of your annuitants.

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. CN 10212021