US. Annuities vs. Pensions: What Retirement Plan Advisors Should Know About ‘De-Risking’

US. Annuities vs. Pensions: What Retirement Plan Advisors Should Know About ‘De-Risking’

Pension obligations are a major liability on many corporate balance sheets. Retirees are living longer than ever, sometimes claiming pension payments for decades. Advisors to pension plans may be called upon for suggestions of how to de-risk employer-sponsored benefit plans. Weighing available options is crucial.

One idea that’s gaining traction: annuities. In recent years, Lockheed Martin, FedEx, Raytheon, Alcoa and others have transferred billions of dollars’ worth of pension liabilities to insurance companies through group annuities — and others are likely to follow suit.

Is such a move — called a risk transfer — good or bad for those companies’ balance sheets, their employees and their retirees? What should you advise your corporate clients who want or need to ease their pension liabilities? They don’t want to be left behind, but are annuities truly a good solution?

The relative strengths and drawbacks of using annuities as pension alternatives are hotly debated. Here are a few things you need to know when considering this option.

Offloading Risk

The idea behind shifting pension obligations to annuity providers is to offload a degree of risk. Employer-sponsored defined benefit plans are a liability, particularly as retirees live longer.

“By passing liabilities to an insurer through a ‘pension risk transfer’ transaction, the company can focus its attention on what it does best — running its business,” says George Palms, president of Legal & General Retirement America, an insurance company in Stamford, Connecticut. “It takes the responsibility [of maintaining pension plans] off the plan sponsor’s shoulders.”

Source: Think Advisor