Gliding into the Future: A Modern Playbook for Pension Sponsors

“There’s a time for playing it safe, and a time for risky business.” Just like Tom Cruise’s memorable character, Joel Goodsen, pension sponsors increasingly find themselves sliding across the metaphorical polished wood floor in socks – except instead of risky teenage rebellion, they are tackling pension liability risk. Defined benefit (DB) plans, once the bedrock of corporate stability, have become increasingly complex.

Cue Bob Seger’s "Old Time Rock & Roll," grab your sunglasses, and let’s glide into an enhanced playbook for pension solutions: de-risking with Pension Risk Transfers (“PRTs”), enhancing yield through increasing exposure to alternatives and proprietary origination, and finding creative liquidity tools that go far beyond the headlines.

Key takeaways:

1. Pension Risk Transfers (“PRTs”) have evolved from niche transactions to mainstream tools, enabling sponsors to transfer risk and stabilize balance sheets amid improved funding levels.
2. A broader toolkit now exists, including private investment-grade credit and funding agreement-backed notes (“FABNs”), allowing plans to enhance yield and access liquidity.
3. Strategic partnerships with insurers and asset managers enhance origination, structuring, and risk management capabilities and equip sponsors to deliver higher yield, greater flexibility, and long-term stability for participants and corporate stakeholders.

From Modest Beginnings to Mainstream Momentum

The aftermath of the Global Financial Crisis (GFC) of 2008 transformed the pension landscape. The unprecedented economic stress and collapsing interest rates not only contributed to exacerbating pension funding shortfalls, but it fueled the start of a broader global market evolution, structurally and by asset class. This was particularly evident in credit.

The GFC’s financial chaos created fertile ground for new growth and innovation, resulting in landmark transactions that fundamentally changed industry perceptions. The concept of PRTs emerged quietly in the shadows of pension finance, offering a bespoke way for companies to manage their pension liabilities more strategically, whether to reduce volatility, improve balance sheet strength, or achieve corporate objectives. Early transactions were small, typically involving bespoke arrangements for specific pension schemes facing financial strain or, sometimes even, sponsor insolvency. PRTs can give sponsors a plan and a clean exit by shifting liabilities to insurers ready to manage risks, matching liabilities precisely, and even creating healthy economics by reinvesting into attractive alternative assets.

By 2012, the market witnessed milestone transactions in the U.S. such as General Motors’ $25 billion PRT transaction and Verizon’s $7.5 billion transfer the same year. These large-scale transfers proved that substantial pension obligations could be effectively managed through transfers to specialized insurers, significantly broadening the appeal and practicality of PRTs. Additionally, regulatory frameworks became clearer and more supportive, particularly with improved guidance from the Department of Labor (DOL), encouraging fiduciaries to manage pension risk actively.

Meanwhile across the Atlantic, the UK market experienced a parallel evolution, catalyzed further by critical regulatory developments. Solvency II reforms increased transparency and capital efficiency, drawing insurers into the space and driving innovation. The late 2022 gilt market crisis became a tipping point. Why? As yields spiked, the present value of pension liabilities fell more rapidly than the decline in asset values, improving funding ratios and in many cases shifting plans into surplus. This sudden improvement in funding positions created a significant incentive for UK schemes to lock in their gains through PRTs, fueling record breaking volumes in the Bulk Purchase Annuity (BPA) market.

The result: total U.S. pension risk transfer premium reached $51.8 billion in 2024, nearly the same peak record as 2022 ($52 billion)¹. This reinforces how de-risking has become a mainstream corporate strategy rather than a reactive solution and PRTs are one solution pensions can utilize. In fact, 2024 also set a record for the number of transactions completed, with 785 deals in total, highlighting the breadth of adoption across plan sizes.

The improved financial health of pension schemes today, both in the US and Europe, has provided a timely opportunity for sponsors to reduce risk.

EXHIBIT
U.S. Pension Risk Transfer Market

Pensions Looking for Private Alternative Assets

Liability-Driven Investing (LDI) and Asset-Liability Management (ALM) strategies sit at the heart of how insurers approach pension risk. LDI strategies emerged as a financial equivalent of cautious oversight, designed to stabilize pension obligations against market volatility through allocations to long-duration bonds and derivatives. But PRTs can move risk entirely off the sponsor’s books. Once liabilities are moved, insurers rely on precise ALM: carefully constructing portfolios that align asset cash flows with pension payment streams. Insurers’ core competency is cash flow matching, supported by asset management and structuring expertise. Furthermore, regulatory frameworks such as Solvency II matching adjustments further incentivize insurers to blend public fixed income with private alternatives to deliver predictable returns and capital efficiency.

But PRTs are no longer the only solution. With thousands of plans now fully funded or in surplus, sponsors are looking for more than just a one-way ticket off the risk rollercoaster. Some need liquidity to meet obligations. Others want to boost returns without giving up control of their assets. This is where insurance companies, especially those with alternative asset management and structuring expertise, are stepping up as partners and not just risk absorbers.

Enter tools like funding agreements, which allow pension plans to tap insurer balance sheets for customized assets that offer yield and liquidity without fully transferring risk. These transactions provide a yield pickup over public IG credit and can be a useful tool to help sponsors smooth cash flows or fund benefit payments over time. At the same time, insurers’ need for long-duration, predictable assets is also driving increased origination in private investment-grade credit, providing pensions with yet another flexible option to enhance returns and diversify their portfolios.

As sponsors offload pension liabilities, insurers face a strategic challenge: how to redeploy capital into assets that deliver yield, duration, and predictability. Over the last few years, demand has grown meaningfully as insurers and traditional public credit investors have converged in search of incremental yield and asset-liability management solutions. The versatility and scale of these transactions have made them an accretive addition to insurers’ reinvestment strategies, bridging yield pickup and duration matching at scale. This convergence of scale, customization, and predictable returns is why we believe incorporating private investment grade assets can be an essential complement to LDI strategies.

This momentum has been supported by a large secular and structural shift across global markets, with investors seeking more risk-adjusted spread, issuers demanding customization and flexibility, and broader access enabling diversified exposure to private markets at scale. For example, the traditional IG credit market has evolved rapidly. The corporate universe has nearly tripled over the past five years while demand for financing continues to outpace supply. Even a modest shift by borrowers toward private IG could represent billions in new issuance annually. Much like the early days of direct lending, investors are looking for yield pickup, more alignment, and less benchmark distortion.

Private IG credit refers to privately negotiated securities issued by high-quality borrowers across corporate, asset-based finance, and real assets. The key distinction from public IG is liquidity: investors accept reduced liquidity in exchange for higher return potential, exclusive origination, and more tailored structures with downside protection. For borrowers, these instruments provide flexibility in designing maturities, amortization schedules aligned to cash flows, and unique features such as embedded options like calls and puts. These transactions are often used to fund large and/or strategic capital needs like an infrastructure project for example. Additionally, many companies look to them for structured solutions that can improve capital-heavy balance sheets and optimize shareholder value.

Sliding into Stability: A Smooth Finish

For pension sponsors, the question is not if, but when and how to act. In our experience, good outcomes can be achieved not by simply off-loading risk, but by partnering with insurers whose core business is managing long-term liabilities. Insurers can bring regulatory oversight, balance sheet strength, and sophisticated portfolio construction to the table. By working together, sponsors can transfer risk, access new yield opportunities, and design solutions that deliver long-term stability for plan participants.

As more plans consider their next steps, market experience and partnership will be critical differentiators. Selecting the right team, one that combines execution scale with the ability to thoughtfully originate accretive assets and manage relationships, communication, and reputational considerations can make all the difference in ensuring a smooth and successful transition.

We believe now is the time to step onto the polished floor, grab the sunglasses, and accelerate into a more predictable future. Engage your advisors, explore your options, and start the conversation about how PRTs, funding agreements and sophisticated reinvestment strategies can transform your balance sheet.

REFERENCES

¹ LIMRA, Aon U.S. Pension Risk Transfer 2024 Report