Classification of insurance claim emails
Using a hybrid model for health claim email filtering could significantly reduce customer support workload, while maintaining a satisfactory response quality.
To put it simply, an annuity placement (or annuity purchase) is a transaction in which a plan sponsor purchases a "group annuity contract" from an insurance company. This contract transfers all responsibility for paying participant pension benefits to the insurance company. Annuity placements have become increasingly popular with corporate sponsors of traditional defined benefit (DB) pension plans as a way to manage pension risk and reduce costs.
Many plan sponsors struggle with this question. An annuity placement makes sense when there is corporate stress in managing the risk associated with the pension plan. A decision to pursue an annuity placement should be viewed as risk-managing strategy above all else.
Some plan sponsors may feel that a low interest rate environment is not the right time for an annuity placement. This is because a lower interest rate increases a pension plan’s liabilities, and therefore increases the annuity placement cost.
There are a number of factors that influence annuity placement timing, however. Consider a buyout that is timed for the end of the plan year, in a low interest rate environment. The plan sponsor already knows the plan’s funding liability and Pension Benefit Guaranty Corporation (PBGC) premiums are likely to climb significantly the following year. An annuity placement before year-end could be used to reduce the plan’s retiree headcount and therefore reduce next year’s PBGC premium and the cost of administering the plan.
Many plan sponsors have seen increased PBGC premiums over the last decade—millions of dollars that were not in the budget and do not get contributed to the plan. With the right strategy, the cost of the annuity placement might be recovered in just one or two years through a reduction in PBGC premiums and other administrative expenses.
Milliman’s Pension Buyout Index, which is published monthly, tracks annuity placement costs by looking at the difference between the pricing interest rates used by insurance companies and the financial reporting discount rates used by plan sponsors. Pricing interest rates are normally a bit higher than discount rates because they factor in the insurance company’s administrative expenses and a profit margin. Figure 1 illustrates retiree buyout costs with two different metrics: the red line represents only the most competitive insurers' rates from each month, while the blue line represents a straight average of all insurers' rates in this study. As shown, the competitive retiree buyout cost has been dropping toward 100% and even below, which means that annuity placements are close to being balance sheet-neutral.
To track the latest results, visit the Milliman Pension Buyout Index.
In addition to keeping an eye on the pricing interest rates from insurance companies, plan sponsors might look at their pension plan’s investment returns to see if it is the right time for an annuity placement. The United States has mostly enjoyed a run of strong investment returns since the global financial crisis. As a result, many pension plans are now closer to being fully funded than they were in the recent past. A fully (or nearly) funded plan is in a better position to consider an annuity purchase, because it can absorb the cost of the buyout along with the possible loss in funded status, compared to a plan that is not sufficiently funded.
There are a couple of things that a plan sponsor should pay attention to before they begin talking to insurance companies about an annuity placement.
Good participant data is a must. Plan sponsors want to avoid spending money on buying an annuity for a participant who doesn’t have a valid mailing address or may not even still be alive. As discussed in our article on data audits, it’s important to spend some time on data cleanup—consider running a death audit on the participants, including their beneficiaries, and verify addresses. There are several tools available to assist plan sponsors with these often overlooked tasks.
You should organize the participant data into groups to help identify the size and potential cost of the annuity placement. For instance, you might want to kick the tires on an annuity placement just for participants from a specific location, or participants with a particular size of monthly benefit. The overall size of the annuity placement is important because a larger placement will generally attract more insurers, often resulting in a more competitive bid. Many sponsors study several participant groups before making a final decision on which group to include in an annuity placement.
You should make sure that you understand the impact that an annuity placement will have on the plan’s funded status, future contributions, and PBGC premiums. Check to see if the plan’s adjusted funding target attainment percentage (AFTAP), a key measure of funded status, is in danger of falling below 80%, which might trigger benefit restrictions. It may be helpful to explore the accounting impacts (watch for settlement accounting, as discussed in this article) and project the plan’s future cash flows. This will help you avoid any costly surprises.
The pandemic did appear to have a dampening impact on pension risk activity in the second and third quarters of 2020. Transactions were down 40% to 50% from these same quarters in 2019. However, there was a strong finish to 2020 and single premium transactions ended 24% higher from fourth quarter 2019, and only 10% lower for the year, according to the LIMRA Secure Retirement Institute's most recent survey of insurers that make up the U.S. pension risk transfer market.
The upward trend in transactions continued in 2021 with a slow start in the first quarter that ramped up as the year progressed. Annuity placements in the fourth quarter have been extensive, likely setting a record for risk transfer activity.
Plan sponsors may again look at ways to manage risk as asset returns stay strong and interest rates remain low. They might consider a staggered annuity placement strategy, leading to an eventual plan termination. And, of course, there may be plan sponsors looking to move forward now with plan termination based on an improved funded status or the ability to fund any shortfall.
Although historical trends are not indicative of future trends, there has been an uptick in pension risk activity over the last several years and it does not appear this trend will end any time soon. As corporations remain watchful over their balance sheets, annuity placements will continue to be effective tools to manage risk.
To see other articles in the Frozen Pension Plans: The Way Forward series, click here.