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Pension risk transfers, plan redesigns needed to secure workers' retirement

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NEW YORK — The emerging trend among U.S. employers of transferring longevity risks from defined benefit pension plans to insurers can help employers and employees, but more needs to be done to improve workers’ financial security in retirement, leading U.S. life insurance executives say.

Significant changes to plan designs are still needed as the U.S. retirement savings system shifts increasingly to a defined contribution model, they say.

Pension risk transfer transactions are well-established in the United Kingdom, where 20% of the largest companies that have pension plans have completed such transactions, and the de-risking strategy is taking hold in the United States, said John Strangfeld, chairman and CEO of Prudential Financial Inc. in Newark, New Jersey.

“Pension risk transfer will play an important role in helping employers keep their pension promises at the same time it provides insurers with an attractive growth opportunity and it leverages core strengths,” he said at the Global Insurance Forum in New York on Tuesday. The forum is sponsored by the International Insurance Society.

The first major U.S. pension risk transfer transaction that Prudential took part in was in 2012, when General Motors Co. bought a $25.1 billion group annuity from the insurer. Mr. Strangfeld said that globally well over $200 billion in pension liabilities has been transferred to insurers through pension risk transfer transactions.

There are five forces driving the transactions, he said.

“The first is capital markets volatility. Twice in recent years, U.S. pension plans saw their funded status fall by 30% or more,” he said.

In addition, regulation has created more rigorous and increased funding requirements; increased accounting transparency has made pension losses more readily apparent; and increased longevity means retirees need more resources to fund their retirements.

“Lastly, and perhaps most importantly, defined benefit plans have increasingly become legacy obligations. They are not part of the current value proposition for new employees,” Mr. Strangfeld said.

Going forward, as employers shift their retirement savings strategies toward defined contribution plans, changes need to be made to plan designs to help ensure that employees have sufficient savings to fund comfortable retirements, said Larry D. Zimpleman, chairman and CEO of Principal Financial Services Inc. in Des Moines, Iowa.

Since 401(k) plans first became popular 25 years ago, too few employees have participated in the plans and those that do participate usually do not save enough, he said.

“Most people do not act in their own financial self-interest,” he said.

To ensure that employees participate and save sufficient amounts, Mr. Zimpleman said defined contribution plans should: include auto-enrollment with a default contribution as high as 8% of pay; include step-up contributions linked to pay increases that move the contributions up to 10% to 12% over time; change employer matches to, say, 50% of the first 8% an employee saves rather than 100% of the first 4%; and ensure that default elections go into target-date funds.