Leadership Series

Liability Transfer Using Annuity-in-Kind Portfolios: An Effective Risk-Management Approach for Plan Sponsors

François Pellerin, CFA, FSA, EA, CERA, MAAA  | LDI Strategist Dan Tremblay, CFA  | Director of Institutional Fixed Income Solutions
October 2013 

  • Many DB pension plans are now considering de-risking by annuitizing some or all plan liabilities.
  • Recently, two large risk transfers through annuitization have used annuity-in-kind (AIK) portfolios.
  • By building an AIK portfolio to the specifications of the annuity seller (typically an insurance company), the plan sponsor may realize substantial savings on the annuity premium.
  • The complexities of building an AIK portfolio include agreeing on the asset specifications, clarifying operational procedures, meeting the diversification guidelines for the portfolio, and hedging the deal risk while preparing for the transfer.
  • Even without an impending risk transfer, plan sponsors can implement immediate operational and investment adjustments that may be immediately beneficial while also making a future AIK transfer easier and more cost-effective.

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