Why the PRT Market Is Thriving
With pension risk transfers seeing record growth, insurers are seeking cost-effective solutions to manage the increasingly complex portfolios and transactions.
and Peter Sanchez, Head of Banking and Treasury Services
Within the past decade, low interest rates have nudged many pension plan sponsors to augment their traditional fixed income strategies with vehicles offering higher returns. However, this came with a few downsides. Namely, the investment transactions were often more complicated, the accounting and reporting burdens grew heavier and the risk profile of the private, alternative, or other non-bond investments could increase markedly with changes in the economic environment. It’s not hard to guess what this has engendered in the last few years.
The pension risk transfer (PRT) market has surged as sponsors look to cut costs, de-risk, and move liabilities off their balance sheets, transferring them to insurance companies that are accustomed to generating guaranteed income from investments. Perhaps predictably, a swelling tide of insurers are discovering that they’re not particularly well-suited – or technologically equipped – to manage these portfolios while also administering the pension and keeping thousands of participants happy. Fortunately for them, a growing variety of outsourcing solutions are joining the marketplace.
We spoke with Christopher Dvorak, Practice Executive, Asset Owners, Americas at Northern Trust, and Peter Sanchez, Head of Banking and Treasury Services for Northern Trust, about the trends driving the growth in the PRT market and how insurers can meet the evolving challenges this upswell is bringing.
Christopher Dvorak: It is safe to say that the pension risk transfer market is extremely healthy. In fact, it hit a record high of nearly $52 billion in premiums across 568 transactions in 2022, which represents a roughly 37% increase in premiums and 28% increase in transactions from 2021. What’s more, the number of active insurers in the U.S. PRT market has roughly tripled since 2016; there are now 21 active insurers, which is the highest number we’ve ever seen. There’s a heavy concentration in the top three players, with each having earned more than $10 billion in premiums in 2022 – but there are also seven other insurers that surpassed $1 billion each in premiums from PRT activity.
In March, Aon’s U.S. Pension Risk Transfer Report predicted that the PRT market will fall back to $30 to $40 billion in premiums, which is still quite material in the marketplace. Overall, the PRT market will remain strong through increased competition amongst insurers, as well as innovative transactions, as it continues to evolve.
Peter Sanchez: This strong growth is due to a combination of three trends. The first is the sheer number of insurers entering the PRT marketplace, which is creating more competitive pricing – and that benefits both the annuitants and the plan sponsors. The second trend is that most of these liabilities are fully funded, which is unusual, so we’re seeing a great deal of de-risking by sponsors.
The third trend is the efficiency and scale that service providers are bringing to this market. These providers include custodians, such as Northern Trust, and placement agents, paying agents, et cetera. Many are offering a streamlined, proactive service model to annuitants that receive the end pension.
Can you say more about how sponsors and insurers are viewing the opportunities and challenges in the current PRT market?
Dvorak: The reduction in plan liabilities due to increased interest rates has improved the funding levels of the plans, and this is generating increased opportunity for sponsors to de-risk and move liabilities off their balance sheets. And the insurers, in turn, are viewing this pool of assets as an opportunity to execute upon what they’re built to do, which is to match assets and liabilities and effectively manage their lifecycle to provide long-term stability for the income needs of the annuitants.
Additionally, pension sponsors are favoring insurers that have a liquidity profile purposely designed to pay annuity obligations over several decades. Insurers active in the PRT space don’t face the same liquidity constraints as pension plans, due to their vast portfolios of insurance assets and their ability to allocate to a broader investment base of both private and public opportunities.
Sanchez: Yes. This growing complexity in the PRT market – in terms of the size of the transactions, the special features they have, and many other factors – is pushing insurers toward the outsourcing model. The three trends I mentioned are also increasingly making insurers understand that they cannot effectively internalize these processes – in terms of technology, expertise, and scale – and certainly not for the long term.
More specifically, insurers are realizing that they need to focus on their strengths, which are risk management and asset accumulation, and then partner with a service provider that can effectively manage this complexity, handle the transactions – the buy-ins, buyouts, swaps, and so forth – perform the annuity payment administration and serve as the custodian. Many insurers have chosen Northern Trust to fulfill these needs, for a number of reasons. A major one is that we have the expertise to handle not only the most complex portfolios, but also the most complex transactions in the PRT space. We bring expertise on the investment side and the transaction side as well.
Dvorak: In 2017, we leveraged our history, expertise, and scale to enter the PRT market in strength and bring our solution to the insurance marketplace – at which point there was a void in terms of scale and choice of service providers.
Over the past seven years, we’ve established meaningful partnerships with insurers who are extremely active in the PRT space. We view ourselves as an extension of their business in terms of providing both custody and benefit payment services to their operating model – and performing these two critical services allows the insurers to focus on investment and risk management. Being that essential partner for them and giving insurers the synergies of our people, our processes, and our data provides them with the efficiencies they need to continue to grow their business lines.
From a custody perspective, as Peter said, we can support the most complex transactions to seamlessly support operational efficiencies and give the insurers the edge when competing across the board. And we can provide these services both internally to their teams and to annuitants.
Sanchez: Insurers are discovering that the combination of having Northern Trust as a paying agent and partnering with a record keeper to do the bookkeeping strongly enhances and supports the annuitant’s experience. Honestly, I think that’s underplayed in this business, in terms of the participants’ experience of receiving their annuity payments and all the related service aspects that the payment agent provides to the participants’ experience.
Beyond being able to manage highly complex portfolios and transactions, what key attributes should insurers look for in choosing an outsourcing partner?
Dvorak: I cannot stress enough the importance of performing thorough due diligence in selecting a partner in this business model. It requires multiple critical components to ensure an efficient flow of data and provide services to the annuitants. The insurer’s partner must be agnostic to the types of investments traded, must be able to evolve as the business continues to shape itself, and must have the ability to scale as demand increases.
The right service provider will demonstrate these strengths through advanced technology and a service model that addresses all the needs of the annuitants. For example, our Benefit Payment Passport system allows not only our clients to track their payments on a lifecycle basis, but also allows third-party record keepers to access, add, modify, and research their payments.
Sanchez: I’ll add that it’s vital for a service provider to have a strong relationship with the record keeper, as well as a deep understanding of the regulatory market and constraints they operate under. This is another key differentiation point for Northern Trust; we have long-standing relationships with the established record keepers. Northern Trust has been providing pension benefit payment services since 1965, and we’re one of the leading providers of pension custody services. We issue about two million periodic and lump sum payments monthly, as well as three million tax forms annually in partnership with the record keepers.
Importantly, we also have working relationships with the newest record keepers in the PRT space – and we can leverage these relationships with insurers.
Dvorak: Pension experience from the corporate side is another differentiator insurers should look for when choosing an outsourcing partner. Northern Trust is one of the few service providers that has this experience. Servicing corporate pensions gives us a powerful advantage in creating continuity of service for participants. Often, we’ll service them through their corporation for years – and then their pension moves over to an insurance company that has chosen us as its administrative and custodial partner, commonly due to a PRT transaction. Those assets never leave Northern Trust. This continuity is important for pensioners/annuitants, and it’s another opportunity to enhance the experience for payment recipients while helping the insurer implement a more efficient, cost-effective service model.
© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret), address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386), Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.