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.)

RELATED TERMS
  1. Savings

    According to Keynesian economics, the amount left over when the ...
  2. Assisted Living

    A type of housing that combines healthcare and help with activities ...
  3. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  4. Skilled Nursing Facility

    A special facility or part of a hospital that provides services ...
  5. Nursing Home Placement Service

    A business that specializes in helping families and patients ...
  6. High-Deductible Health Plan - HDHP

    A health insurance plan with a high minimum deductible that that ...
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. Retirement

    Is Vanguard Right for Your Retirement?

    If you’re thinking about placing your retirement assets with Vanguard, here’s what you need to know.
  4. Wealth Management

    How Linked Benefit Insurance Policies Work

    Linked benefit policies can be a viable alternative to traditional long-term care insurance. Here's how they work.
  5. Retirement

    How to Plan for the Longevity Risk in Retirement

    Retirement can last a long time, which means people have to plan and prepare for the real risk of outliving their nest egg,
  6. Mutual Funds & ETFs

    Generate Income In Retirement Using ETFs

    There are many effective strategies that retirement investors can utilize to fill their income gap. Here are some ideas that employ ETFs.
  7. Credit & Loans

    The Booby-trapped World of Parental College Loans

    Private parent loans can help families pay for college. But the repayment timeline associated with the loans can hurt parents’ retirement savings.
  8. Your Clients

    These Investors Needs More Advisor Attention

    Women live longer than men and their post-retirement finances are in jeopardy. A new report by the National Institute for Retirement Security shows why.
  9. Term

    Evaluating Alpha and Beta

    Alpha and beta are risk ratios that investors use to calculate, compare and predict returns.
  10. Retirement

    Charles Schwab vs. Employee Fiduciary: Comparing Small Business 401(k) Providers

    Learn about the key differences between Charles Schwab and Employee Fiduciary 401(k) plans in terms of company structure, fund offerings and client service.
RELATED FAQS
  1. What are the risks associated with a Roth IRA?

    Like every retirement option, Roth IRAs have several associated risks. Consider all the major disadvantages before choosing ... Read Answer >>
  2. How does a defined benefit pension plan differ from a defined contribution plan?

    Learn the differences between defined benefit plans and defined contribution plans when reviewing employer-sponsored qualified ... Read Answer >>
  3. How do my siblings and I receive inherited pension benefit payments from our deceased ...

    Generally, the provisions of the plan document determine the distribution options available to beneficiaries of retirement ... Read Answer >>
  4. Besides a savings account, where is the safest place to keep my money?

    Savings accounts are safe because investors' deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC) ... Read Answer >>
  5. What are the advantages and disadvantages of mutual funds?

    Mutual funds are currently the most popular investment vehicle and provide several advantages to investors, including the ... Read Answer >>
  6. What is the maximum I can receive from my Social Security retirement benefit?

    Understand the maximum Social Security benefit amount for someone retiring in 2016 at full retirement age and the basics ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
COMPANIES IN THIS ARTICLE
Trading Center