Pension buyouts by life insurance companies are driving a major expansion of the retail market for investor assets, which now tops $18 trillion, according to a new report.
Cerulli Associates, a research firm specializing in asset management and distribution analytics, discloses this finding in an October survey, "The State of U.S. Retail and Institutional Asset Management 2016: Business Planning for Growth Opportunities." The report looks at the U.S. asset management landscape, and identifies distribution opportunities for insurance and financial service professionals including registered investment advisors — the fastest growing advisor segment today.
Low interest rates a key factor
The survey shows asset growth of the retail investor market has consistently surpassed that of the institutional space over the last decade. The report cites as a key reason macroeconomic factors, including historically low interest rates that are fueling a shift from institutionally managed defined benefit pension plans to pension risk transfer arrangements available in the retail market.
"A low-yield environment and a rise in average life expectancy is making it difficult for defined benefit (DB) plans to achieve returns to fund liabilities," states Cerulli Associate Director Jennifer Muzerall in the report. "In recent years, [plan] sponsors have offered lump sums or buyouts to reduce the number of participants in DB plans via pension risk transfers."
These transactions, which entail offloading pension liabilities to a third-party through the purchase of group annuity contracts, have been a growth market for major life insurers in recent years. Among the key players is Prudential Financial, which in September inked an agreement with WestRock Company, a provider of paper and packaging solutions in consumer and corrugated markets.
Under the deal, WestRock will transfer $2.5 billion in pension liabilities to Prudential, reducing its overall U.S. pension obligations by 40 percent. The transfer will cover approximately 35,000 retirees and their beneficiaries.
Also active in the market are:
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Securian Financial Group, which today reported $275 million in pension risk transfer sales;
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MetLife and MassMutual, which in June agreed to take on $1.6 billion in pension liabilities from PPG Industries, a maker of paints and coatings; and
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Voya Financial, which last February sold a $350 million group annuity contract to Chemtura Corp., a Conn.-based specialty chemical company.
Related: MetLife, MassMutual win $1.6 billion pension-risk deal with PPG
Group pension buy-out sales exceeded $1 billion in the second quarter of 2016, the fifth consecutive quarter they've surpassed the billion-dollar mark, according to LIMRA. (Photo: Thinkstock)
The deals inked by these and other life insurers active in the pension buyout space (among them American United, Principal Financial and Pacific Life) are showing up in eye-popping industry stats. According to LIMRA Secure Retirement Institute, group pension buy-out sales exceeded $1 billion in the second quarter of 2016, the fifth consecutive quarter they've surpassed the billion-dollar mark. Activity in the first half of 2016 is up 22 percent compared with the first half of 2015.
