Pension “de-risking” sounds like a fancy term for protecting participants’ interests in their benefits. In other words, take the risk out of pension benefits. Well, not quite. Not even close. Pension de-risking is a scheme to benefit the employers who sponsor pension plans. It refers to ways in which the employer can reduce its own risk that it may not have enough assets to pay the benefits that have been promised or just reduce the expense associated with such promises. While pension de-risking is not new to the pension world, the amount of de-risking and the type of de-risking in recent years should be concerning.
There are a few ways that pension plans can reduce their risk. Older and more common methods are to amend the plan to freeze benefits, terminate the plan altogether or make a lump sum offer to eligible participants. Another de-risking strategy that has become very popular in recent years is for an employer to purchase annuities from an insurance company which then provides the monthly payments to the pensioners. This is more commonly referred to as a “buy-out.” One need only do a simple google search of the term “pension de-risking” to find a plethora of insurance companies chomping at the bit to buy-out pension liabilities.
That begs the question, “why?” Why do insurance companies want to take on these liabilities and why do employers find them attractive? Employers find annuity buy-outs attractive for a few reasons.