Pension Risk Transfer


DEFINITION of 'Pension Risk Transfer'

When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits. Companies transfer pension risk to avoid earnings volatility – they no longer have to pay for unfounded pension obligations – and to free themselves to concentrate on their core businesses.

BREAKING DOWN 'Pension Risk Transfer'

The total annual cost of a pension plan can be hard to predict due to variables in investment returns, interest rates and the longevity of participants. Large companies had been holdouts to the national trend of transferring pension planning responsibility to employees, but that began to change in 2012, when a range of Fortune 500 players sought to transfer pension risk. This included Ford Motor Co. (F) , Sears, Roebuck & Co., J.C. Penney Co. Inc. (JCP) and PepsiCo Inc. (PEP) – which offered former employees an optional lump-sum payment; and General Motors Co. (GM) and Verizon Communications Inc. (VZ) – which purchased annuities for retirees. (See also: risk shifting and transfer of risk.)

  1. Personal Finance

    All financial decisions and activities of an individual or household, ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the ...
  4. Reinsurance Assisted Placement

    Insurance business that is developed with the help of a reinsurance ...
  5. Franchise Cover

    A type of reinsurance plan in which the claims from a number ...
  6. Mass Merchandising

    A method of selling insurance policies in which an employer or ...
Related Articles
  1. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  2. Retirement

    Top 7 Signs Your Pension Fund Is In Trouble

    How to tell if your company’s pension is being depleted - will there be anything left for you?
  3. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  4. Entrepreneurship

    Creating a Risk Management Plan for Your Small Business

    Learn how a complete risk management plan can minimize or eliminate your financial exposure through insurance and prevention solutions.
  5. Retirement

    Retirement Tips for Doctors

    Learn five tips that can help physicians get back on schedule in terms of making financial preparations they need to retire.
  6. Mutual Funds & ETFs

    Top Schwab Funds for Retirement

    These Schwab funds are strategically designed and have performed well on a historical basis, meaning they're solid options for retirement.
  7. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  8. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  9. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  10. Active Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  1. Can catch-up contributions be matched?

    Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
  2. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>
  3. Who offers 401(k) plans?

    401(k) plans are one of the most common retirement plans available. A 401(k) plan must be offered by a business. These plans ... Read Full Answer >>
  4. Does renters insurance cover personal injuries?

    Renters insurance provides two main forms of coverage – liability and contents insurance – and they are offered together ... Read Full Answer >>
  5. Are catch-up contributions tax deductible?

    Catch-up contributions for most qualified retirement plans such as 401(k)s, 403(b)s and individual retirement accounts (IRAs) ... Read Full Answer >>
  6. Does renters insurance cover jewelry?

    Renters insurance provides personal property coverage that covers your personal property – including jewelry – in case of ... Read Full Answer >>

You May Also Like

Trading Center