Current State

Costs, risk, regulations, and complexity have all contributed to a decrease in these employer-sponsored retiree benefits over the last few decades. When we combine today’s rising healthcare and benefits costs, economic instability, and an aging population, the result is a quandary for employers with retiree liabilities. 

Organizations are looking for solutions to lessen and manage these liabilities. A 2022 MetLife study found that 85% of plan sponsors say their company’s post-retirement benefits received significant attention in 2022 from their corporate management because of the financial effects that their volatility and related risks place on their corporate balance sheet and income statement. In fact, the same study estimates that pension risk transfers represented between $50 and $52 billion in 2022. The study surveyed plan sponsors with one or more post-retirement medical and/or post-retirement life insurance plans for current or former employees. 78% of the survey’s plan sponsor respondents work for companies with $100 million or more in retiree medical and/or retiree life insurance plan obligations, putting serious strain on fiscal matters and causing a shift in priorities.

Solutions Available

Insurance companies like taking on pension risk for retirees, because payment amounts are known, as is the form of payment. In addition, the risk is somewhat short-term, related mostly to mortality. Accordingly, insurance companies quote on retiree liabilities with competitive prices, and several plan sponsors have settled some or all of their retiree liability.

Contrast this with terminated vested participants, who may have several decades until retirement. In this case, the benefit amount is dependent on several factors like age at retirement and form of payment elected. There is also substantial investment risk for plan sponsors. While these uncertainties are commonplace in pension plans, insurers build in substantial margin to compensate them for taking on these risks. This can be especially problematic for plan sponsors who have already settled much of their retiree liability, leaving only the less attractive liability to insurers on the books.

U.S. GAAP sets out stringent employer requirements when it comes to accounting for the accrual of estimated total retiree medical and other benefits; however, it does not force employers to fund these obligations. Employers are merely required to recognize them. Recognition nonetheless creates a liability without an offsetting asset.

The good news is that innovative funding mechanisms are available to assist with plan termination. One example is the SECURE Act 2.0, signed into law on December 29, 2022, which paves the way for overfunded pension plans – now defined as those that are at least 110% funded – to transfer up to 1.75% of plan assets to a program used to pay for retiree health and retiree life insurance benefits through 2032. Derisking and buy-out solutions continue to be prevalent as well, although they often come with a substantial margin for insurers. A retiree medical buyout leverages a customized group annuity issued by a highly rated insurance company to transfer the retiree benefit obligation from the corporate sponsor to the insurer. MetLife reports that 84% of surveyed planed sponsors are considering such a buyout for their retiree life insurance liabilities.

More and more plan sponsors are transferring or allocating excess pension assets from overfunded defined benefit pension plans to fund other retiree benefit obligations, such as retiree medical and life insurance. According to MetLife’s 2023 Post Retirement Benefits Poll report, 55% of plan sponsors surveyed have already transferred assets in this way.

Another tactic gaining traction as a viable funding solution for retiree benefits is captive insurance. Companies can rely on IRS Revenue Ruling 2014-15 to set up a captive that exclusively writes noncancellable accident and health insurance to cover retiree health benefits. With the coverage being life insurance, the captive’s reserves will receive life insurance tax treatment which thus allows the reserves to grow tax free. More importantly, the company is able to fund the retiree health benefits in a new captive without DOL approval since they do not fall under ERISA. This is the type of status-quo-challenging strategy that may prove critical for organizations grappling with defined benefit plan promises, given today’s difficult market conditions.

Case Study: Utilizing a Captive Insurance Arrangement to Manage Defined Benefit Pension Risk

Spring has worked closely with the pension risk transfer groups at insurance companies, who consistently price liabilities for settlement at 20% or higher than the US GAAP liability that plan sponsors recognize on their books for vested terminated participants. This is significantly higher than retirees, who can sometimes be priced at or even below the US GAAP liability.

Spring has developed solutions for clients to settle plan liabilities at very close to what plan sponsors currently recognize. This is a substantial savings to plan sponsors, and it allows the plan to be terminated sooner. Below we are bringing some of these concepts to life with a case study.

The Challenge:

A plan sponsor with a billion-dollar pension plan wanted to review risk management options for their plan, including how best to manage a large bulk annuity transaction. The organization had previously completed smaller transactions, including retiree annuity buy-outs as well as vested term lump sums. They were now looking to complete a much larger annuity transaction, but they wanted to better understand the full spectrum of options. A traditional annuity transaction would have been quite expensive given the conservative nature of how commercial carriers price deferred liabilities. While many factors impact the price of a transaction, the low interest rate environment, mortality risk charge, as well as conservative long-term investment options all contributed to a much higher transaction cost under a standard plan termination than the sponsor felt was reasonable.

The Process

Spring assessed various risk management options for the organization to consider, including an additional vested term lump sum window with a robust communication program to increase the take rate as well as a much larger bulk annuity transaction for the entire plan. The organization was interested in exploring an additional lump sum window, but ­first wanted to focus on how best to move forward with a cost-effective bulk annuity transaction. Rather than exploring these options with their plan actuary, the plan sponsor was also looking to work with an organization that could provide for a more objective and independent analysis without any conflicts of interest.

We reviewed options for a possible bulk annuity transaction with the organization which included both buy-in and buy-out strategies. We recommended exploring the use of a captive to improve the overall cost and participant security of the bulk annuity transaction. Using a captive can substantially lower the cost of the overall transaction, particularly for plans looking to transfer obligations for more than existing retirees only. A captive provided several benefi­ts including:

  • Lower cost of overall transaction
  • Increased operating income
  • Control over assets
  • Risk diversi­fication in the captive
  • Improved participant security
The Results

This strategy yielded the following positive impacts:

  1. Over a 10% reduction in the one-time premium outlay for the transaction
  2. Participant security is enhanced because the captive provide an additional commitment to pay the bene­fits in addition to the fronting carrier.


Innovative tactics are available for organizations facing financial stress related to defined benefit plan liabilities, combined with the volatile market circumstances we’re seeing today. If your organization has pension plan liabilities and is looking for a strategy to mitigate this burden, you may want to evaluate the different options available to ultimately help you realize savings and enhance your risk management strength.