Enticed by the opportunity to shift balance sheet risk and reduce the Pension Benefit Guaranty Corporation (PBGC) premium “tax,” the interest in pension risk transfer among plan sponsors continues unabated. In addition to the commonplace lump sum window programs seen across the defined benefit marketplace, group annuity purchases for retirees have received increased attention from plan sponsors. Initially sparked by 2012’s landmark transactions by Verizon and GM, sponsors’ 2018 pension risk transfer (PRT), by way of annuitization, resulted in the highest level of annuity purchases, with more than $28 billion in executed annuity placements (including both retiree-only annuitization and full plan terminations). As the market has grown, we have witnessed several areas of innovation surrounding deal execution.
The purpose of this paper is to focus on one specific area which has evolved dramatically, asset-in-kind (AIK) funding of an annuity purchase. AIK is most simply described as funding a portion of an annuity contract price with a transfer of securities, most often long corporate bonds, instead of cash.
To help assess the implications of AIK funding of an annuity purchase, pension plan sponsors should consider three important questions:
- What are the benefits of AIK vs. cash?
- What should be considered when deciding to fund a transaction with cash or AIK?
- Should an insurer-ready LDI portfolio be implemented prior to an annuity purchase transaction?
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