NISA Unveils Key Insights for Fiduciaries in Partial Annuity Buyout Transactions
October 31, 2023 by NISA
- Partial annuity buyout transactions inherently pit two groups of participants against one another: (1) those in the transaction and (2) those remaining within the plan.
- NISA uses standard bond math to assist fiduciaries in quantifying the economic cost to each group.
- Results underscore the importance of fiduciaries considering the “safest available” provider, as measured by NISA’s Economic Loss to Beneficiaries (ELB)SM calculation.
ST. LOUIS, Oct. 26, 2023 /PRNewswire/ — NISA Investment Advisors, LLC (“NISA”) released a new and intuitive economic model that sheds light on the dynamics of Pension Risk Transfers (PRTs), particularly partial annuity buyout transactions and the crucial role of fiduciaries in balancing pension plan participants’ interests.
In a world where partial annuity buyout transactions inherently pit two groups of plan participants against each other—the participants in the transaction and those remaining within the plan—NISA employs standard bond math to quantify the economic cost to each group. The results underscore the paramount importance of fiduciaries considering the “safest available” provider, as measured by NISA’s Economic Loss to Beneficiaries (ELB)SM calculation.
- NISA’s research reveals that, in nearly all scenarios, fiduciaries seeking to balance the interests of participants should opt for the “safest available” provider, as measured by NISA’s ELB measure.
- NISA’s October 2022 analysis titled “Pension Risk Transfers May Be Transferring Risk to Beneficiaries” highlighted the significant credit quality variations among typical PRT providers, as measured by the bond market and the corresponding economic loss to beneficiaries (ELB). The ELB represents the negative externality that impacts plan participants when fiduciaries choose a lower-quality credit PRT provider over the “safest available.”
- In its latest analysis, “Who Reaps the Benefit of Competitive PRT Pricing? A Simple Economic Model,” NISA leverages the ELB framework to assist fiduciaries in making informed decisions. This most recent analysis demonstrates why solely selecting the lowest-cost provider may not adequately balance the interests of all stakeholders.
NISA demonstrates that the two participant groups’ interests are equitable when the following equation holds:
Bond Spread Difference Between Insurers = % Difference Between Insurers * Sponsor’s Bond Spread
If the left-hand side of the equation is greater than the right-hand side, choosing the lower quality, lower cost insurer harms the transferred participants more than the remaining participants—and vice versa if the right-hand side is greater than the left.
David G. Eichhorn, NISA’s CEO and Head of Investment Strategies, noted, “Our framework provides fiduciaries with a quantitative, market-based way to balance the competing interests of different participant groups. But perhaps the most valuable conclusion from the analysis is the identification of the extreme inelasticity in the relationship between insurer credit quality and the required transaction discount to choose a lower-quality insurer. In all but extreme situations, selecting the highest quality insurer, irrespective of price, will be the prudent decision.”
Please visit our website by clicking here to view additional articles and supporting data regarding PRTs and their impact on beneficiaries.
About NISA Investment Advisors, LLC
NISA Investment Advisors, LLC is a registered investment adviser, and manages assets for some of the largest institutional investors in the U.S. NISA is 100% employee-owned and based in St. Louis, Missouri. Client portfolios include investment-grade fixed income, derivative overlay and equity investments. As of September 30, 2023, NISA managed $249 billion in physical assets and $220 billion in derivative notional value in separate account portfolios. $18.3 billion in Repurchase Agreement notional and underlying assets are reported in both physical assets and derivatives notional value under management.
Michael Herley for NISA Investment Advisors, LLC
email@example.com or 203-308-1409
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