Sponsors weigh market volatility and funding status as PRTs top $11bn in Canada and $51.8bn in the US
Pension funding has recently weakened due to poor stock market returns, raising challenges for plan sponsors and asset allocators aiming to de-risk or consider pension risk transfers (PRTs), according to Chief Investment Officer.
October Three Consulting noted that US President Donald Trump’s initial tariff announcement had caused a sharp drop in interest rates used for annuity pricing, increasing annuity costs.
However, a subsequent 90-day tariff pause spurred a significant rate rebound, creating what the firm called a “critical window of opportunity” for plan sponsors to carve out retirees in a PRT.
Partner Mark Unhoch explained that pension outcomes varied depending on investment approaches.
Plans using a liability-driven investing (LDI) strategy may have outperformed others by aligning assets and liabilities to reduce funded status volatility.
“Pension plans saw a double whammy at the beginning [of the month], where interest rates and the market dropped,” said Unhoch. “But interest rates have come back to where they were before the drop…”
He added that while insurance companies do not use the 10-year Treasury as a credit rate, it remains a useful indicator, currently around 4 percent.
October Three observed modest interest rate increases for annuity purchases in March, with 7-year duration annuities rising six basis points and 15-year annuities increasing 17 basis points.
Unhoch said many sponsors paused on PRTs over the past month to observe market trends, but some clients are now preparing to transact quickly due to the interest rate turnaround.
“The insurance companies are kind of light right now, because people have taken a pause, so it is a good time to transact if you can act quickly,” he said. Fully or over-funded plans may find this an opportune time to implement LDI strategies.
LIMRA reported US single-premium PRT sales reached US$51.8bn in 2024, a 14 percent increase from the previous year. According to Unhoch, Q1 2025 was relatively stable, with $5.5bn in total sales.
However, underfunded plans could face higher future contributions due to recent losses, and October Three advised sponsors to evaluate risk mitigation options. The firm recommended consulting annuity brokers to review market conditions and consider strategic responses.
According to Chief Investment Officer, sponsors must also meet fiduciary obligations under the Employee Retirement Income Security Act when selecting annuity providers.
The Department of Labor’s Interpretive Bulletin 95-1 outlines that sponsors must prioritise participant safety and interests, not just price or insurance ratings.
In Canada, the pension risk transfer market grew significantly in 2024.
According to Benefits and Pension Monitor, Brent Simmons, head of defined benefit solutions at Sun Life, reported nearly $11bn in transactions—up from $7.8bn in 2023, marking 40 percent year-over-year growth.
Simmons cited Mercer’s Pension Health Pulse, which estimated Canadian pension plans were 125 percent funded at year-end 2024.
Strong funded positions, combined with cost-effective annuities, market volatility, and administrative demands, are leading more sponsors toward risk transfer solutions.
“Plan sponsors have been on a rollercoaster for decades,” said Simmons. “At times, their funded status was much, much lower than 125 percent.”
He noted that many sponsors now seek stability, and repeat PRT buyers are increasing—with over 25 in 2024 alone. Simmons said this trend highlights the growing role of PRTs as a common strategy.
He also addressed the operational burdens of pension management, noting that transferring risk to insurers allows sponsors to focus on core business operations.
Annuities also offer retirees guaranteed payments from regulated insurers, improving member security.
According to Advisor.ca, Sun Life reported $11bn in pension risk transferred to group annuities in 2024.
Of this, $3.3bn involved inflation-linked annuities—up from $2.5bn over the previous three years combined. Approximately 25 of 130 sponsors were repeat buyers, totalling $4.6bn in premiums.
Simmons observed that while Canadian group annuities totalled about $4.5bn from 2018 to 2020 and held steady at $7.8bn from 2021 to 2023, 2024 marked a sharp jump.
He expects the market may stabilise around the $11bn level before seeing further growth.
He identified five drivers for risk transfers: funding status, plan size, volatility, annuity price, and maintenance time.
Though interest rates affect funding, Simmons noted that sponsors’ hedging strategies often buffer against these changes.
Simmons emphasised the importance of data accuracy in PRT transactions, urging sponsors to clarify annuitant details, spousal benefits, and conduct data audits.
“We would call data risk as being one of those things when you do a PRT transaction that you want to spend some time mitigating,” he said.
He also warned that sudden market downturns can erode funding levels, making proactive risk transfers attractive. Longevity, investment, and inflation risks—particularly in plans offering CPI-linked benefits—are key concerns pushing sponsors toward annuities.
While annuities are often seen as expensive, Simmons argued they are cost-effective relative to corporate bonds.
“Annuities offer better yields while eliminating longevity, investment, and operational risks,” he said, adding that they act as fixed income instruments that hedge liabilities.
Simmons also encouraged transparency with plan members during transfers, assuring them that pension terms remain unchanged and are now backed by highly regulated insurers such as those covered by Assuris.
“Members are generally quite happy and getting that peace of mind that their pension is now being paid by an insurer,” he said.
