US - Prudential Retirement has completed the first pension buy-in transaction in the US with a $75m pension risk transfer.
Hickory Springs Manufacturing Company signed on as Prudential's (known as Pramerica in the UK) inaugural client using its Portfolio Protected Buy-in, the first product of its kind in the United States marketplace.
Prudential's Portfolio Protected Buy-in is a separate account solution that combines Prudential's guarantee with a separate account portfolio to provide additional security. The product is specifically designed for defined benefit plan sponsors who seek to transfer risk while preserving plan funded status. Portfolio Protected
The buy-in does not trigger settlement accounting or accelerate pension contributions, the firm added.
Buy-ins, which are well-established in the UK pensions market, guarantee to meet the pension plan liability payments as they fall due. The guarantee is provided by the insurer in return for a premium. The insurance contract becomes an asset of the pension plan, and is in effect a match for the benefits covered by the policy.
The plan participants see no change and continue to receive their monthly benefit from the plan administrators. Similarly, from the sponsor's perspective, the pension fund assets and liabilities remain on the balance sheet.
"Prudential is pleased to be the first company to bring a pension buy-in to employers in the U.S. We are also honoured to be Hickory Springs' provider of choice," said Phil Waldeck, senior vice president and head of Prudential Retirement's Pension & Structured Solutions business.
"Prudential's Portfolio Protected Buy-in will help Hickory Springs reduce its pension plan risk and fulfill its fiduciary obligations. This transaction underscores Prudential's ability to deliver flexible, innovative solutions that combine our core strengths in retirement, insurance and asset management."
Steve Ellis, chief financial officer of Hickory Springs, added: "With the help of our advisor BCG Terminal Funding Company, we selected Prudential Retirement because of its flexibility in structuring a solution that we feel will help us fulfil our fiduciary obligations and enhance our employees' retirement security," said. "We were impressed with the Prudential Retirement team's expertise and continued focus on our business needs."
The announcement was welcomed by consultant Mercer, which said the deal clarified several barriers which were holding up the development of the market.
Kevin McLaughlin, Principal of Mercer's Financial Strategy Group, added "We have been following this closely and know that Prudential has put significant effort into overcoming the legal, structural and accounting complexities. We see buy-in as another useful addition to the suite of tools available to help plan sponsors manage pension risk. We expect growing demand for this product over time and that further innovations will emerge."
McLaughlin noted, however, that "the insurance product is one among a growing list of solutions. We are also seeing a lot more interest in liability driven investment strategies (LDI) and dynamic de-risking approaches. While the growth in solutions is good news for plan sponsors and fiduciaries, the key challenge is to determine the best overall risk management approach given specific objectives and constraints."
To read more about the development of buy-ins in the US, click here.
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