Should Kinder Morgan Employees be Concerned About Pension Transfer Risk (PRT) Strategies?

In an era where the sustainability of pension plans remains an intricate aspect of corporate financial management, the proactive adoption of strategic approaches such as Pension Risk Transfer (PRT) surfaces as pivotal. Historically, enterprises instituted pension plans for an array of reasons, such as the attraction and retention of proficient employees, workforce management, conforming to employee expectations, and optimizing tax benefits. However, complexities arise due to the annual cost and administrative intricacies of offering such pension plans, significantly influenced by variable factors including investment returns, interest rates, and participant longevity. This article will analyze the specific implications for Kinder Morgan employees whose companies are experiencing this transition. 

A meticulously detailed examination into PRT elucidates a strategic mechanism wherein a defined-benefit pension provider endeavors to extricate some or all of its obligations to pay guaranteed retirement or post-retirement benefits to plan participants. Notably, during PRT transactions, pension providers typically transfer assets to a life insurer, and subsequently, the insurer assumes the annuity risk for plan participants. It is important for Kinder Morgan employees to determine if a PRT is happening at their company. Occasionally, such transfers are also initiated due to negotiations with unions aiming to restructure the pension terms.

Amplifying this perspective, data from AM Best revealed that in 2019, there were in excess of premium pension contract buyouts, amassing to a staggering $28 billion. This trend, propelled by organizational endeavors to mitigate their pension liability, is anticipated to perpetuate, allowing companies to sidestep earnings volatility and empowering them to focus intently on their cardinal business demands.

Kinder Morgan Employees (if they receive a pension) must be aware of the spectrum of risks that is embodied within pension transfer transactions, notably including:

• Longevity risk: The risk of participants outliving the predictions of current annuity mortality tables.
• Investment risk: The risk of designated funds for retirement benefits not achieving projected investment returns.
• Interest rate risk: The risk of alterations in interest rates inciting substantial and unpredictable variations in balance sheet obligations, net periodic cost, and obligatory contributions.
• Proportionality risk: The risk related to a plan sponsor’s pension liabilities becoming disproportionately voluminous relative to the sponsor's remaining assets and liabilities.

Moreover, the PRT strategies can be compartmentalized into four predominant types: (1) longevity reinsurance, (2) buy-in, (3) buy-out, and (4) lump-sum payments. A 'buy-in' strategy involves an insurer disbursing the monthly annuity amount to the plan, which perpetuates making pension payments to participants. Contrastingly, a 'buy-out' occurs when an insurer establishes a direct, irrevocable commitment to each covered participant to execute specified annuity payments.

Pensions and their congruent assets that are transferred to life insurers are commonly held in a “separate account.” These separate accounts are methodically organized and structured, isolating their activities legally from the typical operations of an insurance company. They delineate the separate account assets, liabilities, and activity within a distinctive blank, with the total assets and total liabilities of the separate account being represented in the total assets and liabilities of the life insurer, in accordance with Specific Accounting Provisions outlined in SSAP No. 56.

Kinder Morgan employees must be aware that an analysis of the separate account annual statements filed with the National Association of Insurance Commissioners (NAIC) revealed a generality wherein entities did not specifically detail PRT activity. Rather, they broadly amalgamated this product into other product categories, for instance, group variable annuity. However, recognizing the recent and anticipated future growth of PRTs, regulators sought the capability to more readily identify PRT activity, specifically to facilitate assessments regarding whether the assets held in the separate account are projected to sufficiently cover pension liabilities.

Addressing regulators' needs for heightened visibility on PRTs, in May 2021, the Statutory Accounting Principles (E) Working Group adopted agenda items 2020-37 & 2020-38, which, while not altering SSAP No. 56, did support the adoption of its sponsored agenda item (2021-03BWG) at the Blanks (E) Working Group. The blanks agenda item refined the separate account instructions and now mandates that a unique disaggregated product identifier be utilized for each product represented, thus PRTs are now required to be specifically and distinctly identified and disclosed. Effective for year-end 2021 reporting, these modifications are significant, dictating a specific identification for each separate account product filing or policy form (e.g., each PRT).

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The incisive evolution of PRTs within the financial management landscape underscores their fundamental role, particularly amidst a milieu of dynamically evolving regulatory frameworks. Balancing the intricate interplay between safeguarding employee pension plans and ensuring fiscal prudence necessitates a conscientious understanding and navigation of these mechanisms, thereby ensuring the sustained integrity and financial health of organizations traversing these multifaceted terrains.