Pension Risk Transfer

AAA

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.

INVESTOPEDIA EXPLAINS '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.)

RELATED TERMS
  1. Lloyd's Of London

    A British insurance market where members join hands as syndicates ...
  2. Reinsurer

    A company that provides financial protection to insurance companies. ...
  3. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  4. Level Death Benefit

    A life insurance payout that is the same whether the insured ...
  5. HIPAA Waiver of Authorization

    A legal document that allows an individual’s health information ...
  6. To Fund

    A type of target-date retirement fund whose asset allocation ...
Related Articles
  1. 7 Signs Your Pension Fund Is In Trouble
    Retirement

    7 Signs Your Pension Fund Is In Trouble

  2. Top 7 Signs Your Pension Fund Is In ...
    Retirement

    Top 7 Signs Your Pension Fund Is In ...

  3. It's Never Too Early To Start Saving
    Savings

    It's Never Too Early To Start Saving

  4. Unpredictable Event Or Bad Investment?
    Bonds & Fixed Income

    Unpredictable Event Or Bad Investment?

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center