Annuity buyouts: Why aren’t 98% of plans doing them?

Editorial Note: This post originally appeared on our companion blog, Fiduciary Matters, on October 6, 2016.


As my colleagues and I discussed this series on “the big DB questions of 2017,” and the topic of annuity buyouts in particular, we ended up deciding that the key question for most plans is not actually about what happens when you do an annuity buyout, but rather about what happens when you don’t. After all, that’s the position 98% of large plans are in.

“What else is there a conference about that 98% of plans aren’t doing?”

As we put this series together, the general topic areas seemed to pick themselves: interest rates; funding; annuity buyouts; and outsourcing. The real work lay in discerning exactly what it was about those topic areas that plans were grappling with.

On annuity buyouts, it was (as it often is) Jim Gannon who put his finger on the issue:

“You can go to whole conferences in multiple cities about annuity buyouts. There are three breakout sessions at the Society of Actuaries annual meeting that touch on it. But in the past five years there have been only a dozen or so transactions of more than $500M in the U.S.[1] Granted, there may be more this year, but there are something like 600 pension plans over $500M.[2]  What else is there a conference about that 98% of plans aren’t doing?”

(At this point he hesitated: “Is this turning into a rant?” I point out that this is the internet; we’re probably OK.)

The bigger story (for now)

To be sure, annuity buyouts are a growing story, and in the long run just about every closed or frozen plan will be looking into some form of annuitization. But that’s not a 2017 story in most cases.

What, then, is the 2017 story? Here’s Jim again:

“Once a plan is frozen, it creates a new dynamic and there’s a frozen plan lifecycle that kicks in. Plans need to be run cost-effectively as they move through that lifecycle. Until recently, there wasn’t even a name for that transitional period where you know you’re on the path to a buyout, but it’s not cost-effective to do it yet. Increasingly, that period is now being referred to as hibernation. For most plans, right now, the focus needs to be on getting hibernation right. That’s about cost management as well as risk management.”

In a recent paper on the subject, Justin Owens and I referred to hibernation as “the forgotten stage of the pension plan path.” In reality, it’s one of the most important stories of 2017, no matter how little it’s being talked about.


[1]Large Employers Turn to Annuity Buyouts for Defined Benefit Plans” Workforce.com. March 17, 2015.

[2] Source: Russell Investments and FactSet data for financial year 2015.