Pension Derisking

In Detail

Pension derisking encompasses a range of strategies plan sponsors use to reduce the financial volatility and long-term obligations associated with their defined benefit plans. The most common derisking strategies include: lump-sum buyout offers to terminated vested participants (offering a one-time payment to settle the pension obligation), annuity lift-outs (purchasing group annuity contracts from insurance companies to transfer pension obligations for a group of retirees), liability-driven investing (shifting the investment portfolio from equities toward bonds that more closely match pension liabilities), and plan freezes or terminations (stopping the growth of future benefits). Major corporations have engaged in significant derisking activity in recent years. General Motors transferred $26 billion in pension obligations to Prudential in 2012, one of the largest annuity transactions in history.

Many other companies have offered lump-sum windows to former employees. For participants, derisking has mixed implications. Lump-sum offers shift longevity and investment risk to the individual but provide flexibility and a potentially valuable inheritance. Annuity transfers replace the employer's promise with an insurance company's promise, which may be more or less secure depending on the relative financial strength of each.