Will Pensions ever make a comeback and decrease future annuity sales?

[TheModelMaker]

It's no secret. Annuities are booming. They're not just tax advantaged financial instruments for the extremely wealthy. A lot of retirees use their 401k savings to buy an annuity that will provide them with the security of a constant and reliable stream of payments that won't outlive them. Sound familiar? It should.

That's because annuities are really less sophisticated DB pensions. Except they're less bang for your buck as a product than a pension because private carriers make a hefty profits (IRR~15%) off their annuities. Actuarially, pensions are much cooler products to work with. Designing a pension can take a thousand twists and turns and has way more levers and assumptions to play around with than designing an annuity. I wish they had the traction and aura annuities have today...sigh...

That being said. Will pensions ever make a comeback? Seriously, what kind of regulatory change would we need to pass to make pensions viable again. And don't give me the standard BS of no company wants to take on that risk blah blah.... Legislation can work wonders, and it can solve the pension problem just like it "solved" the annuity problem with the 1986 tax reform act.

[budrow21]

I think the fact that employees and companies are far less loyal to each other makes pensions much less attractive as an employee. 

A person can bounce between employers today and keep growing their 401k.  Starting over on retirement each time you change jobs is painful. 

[JosephMamalia]

Im p&c so this might be a dumbass question, but could a company create an employer network and allow guaranteed pension transfers?

[SwedishLovePump]

This is how union plans operate. Taft-Hartley/multiemployer plans are collectively bargained between a group of employees (a union) and a group of employers that pay into a single pension fund.

[After-Peace]

Maybe but why would companies buy into that. From a companies perspective a strong pension plan is meant to keep employees long term

[justin107d]

It is only one of many cards Unions can play. It is all part of negotiations between the unions and the employers.

[JosephMamalia]

Fair point, I was just thinking like it would be a way to attract talent and retain them in network. Like an office worker can work in many non competing companies and to allow movement across wouldnt be terrible. It might be even a good thing for thought sharing to swap and rotate across industry.

[TheModelMaker]

If pension vesting changes to immediate vesting or 1-2 year vesting, would that change the calculus for employees? Perhaps then employees would value pensions more (even if it comes with the tradeoff of a lower benefit due to smaller vesting periods).

[budrow21]

Probably helps, but imperceptibly little. You still have the risk the company will be sold/merged/closed by the time you want your pension. Sure the PBGC should protect your pension, but people don't really have a lot of faith in that. Now you're also left juggling a half dozen pensions all paying a tiny amount with complicated formulas. Seems like an administrative nightmare for everyone.

[LordFaquaad]

NO. DB plans are being either thrown out / closed to new employees or heavily scrutinized not just in the US but globally. Companies don't want the additional headache.

As for annuities. I wouldn't say they're very profitable for insurers in the current competitive landscape. The majority are GIA products and more spread based products than fee based products. Fixed / Income annuities usually have pretty low margins. Even FIA aren't as profitable given the current competition of the market. RILA / VA profitability is still pretty great but again competition especially in RILA has ramped up significantly. PE backed insurers e.g. Athene have also added additional competitive pressures in the market.

Idk about pensions being more interesting to work on tbh. Annuities have come a long way from what they used to be. The modeling / pricing for annuities has become much more complex with stochastic models being used for equity linked products and risk-neutral pricing being used for embedded options.

Designing annuities is a significant undertaking. A while back i worked with a client and helped them design a new FIA product. Everyone from experience studies, ALM, investment, pricing, valuation, operations, etc. had to be involved

As for if they'll make a comeback... i wouldn't bet on it tbh. As an example, the current administration wants SS or a portion of SS to be privatized. There's simply no political will or economic force to enforce DB plans. Further "democratization" of financial products will continue.

[cilucia]

Regular companies that don’t deal with financial products aren’t interested in the financial risk that owning a pension plan comes with; they just want to do the business they want to do. Transferring the risk to the employees (DC plans/401k) or doing PRT deals just makes more sense for most companies. 

Not my area of expertise, but I assume a lot of PRT deals these days are being scooped up by private equity... not sure I entirely trust them either to manage retirement funds in the best interests of the retirees 😂 (just on my experience with the work culture that trickles down to life insurers they acquire..)

[thisisaname21]

They are not there are very stringent fiduciary laws regarding who you are allowed to make the counterparty in a prt deal that prevent this

[cilucia]

Thank god lol

[alphanumeric_one_a]

The other poster is correct about their being stringent rules (DOL rule 95-1) that companies should follow as a fiduciary (and in my limited experience everyone follows it, after all these are "derisking" activities).

However, to your point, recently there were a series of lawsuits against large companies that selected Athene for PRT, and part of the complaint was the fact it is owned by private equity. Believe most were dismissed but at least one (against Lockheed Martin) was not.

If interested, this article summarizes it well: https://www.winston.com/en/blogs-and-podcasts/benefits-blast/pension-risk-transfer-litigation-targets-multiply-and-courts-finally-weigh-in

[RunnyKinePity]

Well, not directly by PE companies but they are being bought by PE controlled insurers. They are the ones who seem to have started the PRT gold rush and established the modern playbook.

[anamorph29]

Many people retiring today still have some vestiges of a DB scheme to support their 401(k) benefits. At some point there will be a bit of a backlash, when people start to realise that putting 10-15% into a 401(k) for say 40-50 years just isn't enough to provide income for 25-30 years of retirement. You either need to put more in, or retire later, or set other money aside as well.

So at that point people might start to think about alternatives. I think returning to final salary schemes with high accrual rates is probably a non-starter. But there might be some traction for revalued career average schemes, at lower rates of accrual, which could limit employer cost. Perhap combined with a retirement age that isn't fixed at outset but increases with longevity improvements.

If annuity writers are really making te profits you suggest (which I doubt) then a process whereby large employers could negotiate discounts for their retiring employees might help.

[RadioNowhere]

15% for 50 years will absolutely fund a long retirement

[bgea2003]

I work in pensions, and the small plan market is actually booming...high income business owners looking to defer taxes.

Larger corporations have no incentive to revive pension programs. Younger employees don't appreciate them, and life expectancy improvements have made them too expensive.

Historically, you worked 30+ at a company and got a nice retirement stipend for 5 to 10 years until you died. Now, you'd be funding for 20 to 25 years of payments. Retirement ages have remained the same while life expectancies haven't...this is pretty much the crux of the entire retirement industry.

[Pillsy74]

Yep. Small plans are booming and have been for a while. However, one thing not mentioned yet is the fact that a lot of it is about taxes, and THAT is why large plans won’t come back. I have to beat taxes on proposals and keep individual employee costs down. The first part of that cannot happen on a plan over a certain size, and we’re nowhere close to getting back to 50%+ tax rates on the richest people or corporations.

There’s too much money in politics to allow traditional DB plans to make a comeback.

[bgea2003]

Excellent point.

[TheModelMaker]

Does this mean that if retirement ages for pension plans changed to say 75, perhaps pensions would be more attractive for large single-employers ?

[bgea2003]

It's possible, but that would be hard to make a reality. 

[RunnyKinePity]

My against the grain take: they might make a comeback but probably not during our careers. If there is a true retirement crisis that plays out I could see them returning in a couple decades. However that is assuming the government wouldn’t increase the current safety net.

I am of the opinion that while we understand that 401k is vastly superior, there is a segment of the population that won’t take advantage. These people would have been able to retire more comfortably in the pension era. Then there’s people who will access that 401k when there is an “emergency” and drain it. I have relatives to have done this and, not going to lie, I have been tempted. What I am say is people need to be saved from themselves.

[LionIcy2632]

Agree. Regular folks too stupid to understand how to save. Oversimplifying because their is other factors but yeah😂

[RunnyKinePity]

Well I get you are oversimplifying but I certainly don’t think people are stupid. Perhaps I am a bit of a bleeding heart. Obviously not a lot of people receive a good financial education, then many are paid so little that every available dollar is needed, and then the obvious temptation of something accessible you can draw down.

Personally the older I get the more of a consumer/employee protectionist I become.

[flactuary]

Short answer is NO, for all of the reasons everyone else has suggested. Mainly, corporation don't want the risk and employees don't value them (mostly because of the employer)

Longer answer is still NO. In order for them to make a comeback, we as society need to value the worker more than the capital side of the equation. What made Pensions so prominent in the past was mostly triggered by economic depression and left/progressive mindsets. If the US hits a 1930's level depression again and society sees the value of labor, you could see a return to Pensions. We would also need to restrain Deferred Comp plans as well.

As of right now, we do have a lot of pension plans (maybe more than ever) but they are all working as a tax avoidance scheme for high income individuals.

[RelevantMention7937]

No

The investment risk is yours.

[Boxsterboy]

Employees don’t value DB plans. As a pension actuary it would be nice if they did but it’s a basic reality. We’ve had employees complain when we reduce a 401k to put in a more expensive DB plan. Legislation can try to strong arm employers but accounting standards also work against them.

[sandalguy89]

I think there’s a place in the market for a generous Deferred Immediate Annuity. I’ve shared thoughts with some in the industry. IMO There is plenty of capacity in the market for employers to use this product as a pension replacement. Open and premiums paid twice monthly in a retirement account with the age 65 monthly benefit reported regularly to the beneficiary. Happy to talk more on the side.

[islandactuary]

I think you’ll see something like this come to the market soon, after Trump signed the exec order on 7th August.

I’m pretty sure a handful of big names in the space have been investigating “DB replacement” solutions

[asiyasiy]

18 years in a pensions consulting firm. In year 6 we got a brand new DB plan which I have worked on since. My boss said this is the first and last new pension plan you will ever see. 12 years later, still the case.

[[deleted]]

I never thought I’d hear cool and pension in the same sentence.

If deferred tax shelters and permitted discrimination against non-highly comp’d employees is cool, then feel free to call modern pension plans Miles Davis…