Pension Risk Transfer Strategies

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on May 23, 2023

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What Are Pension Risk Transfer Strategies?

Pension risk transfer strategies are financial tools and techniques that help companies and plan sponsors manage the risks associated with their pension liabilities.

These strategies are essential in today's business environment as they provide stability and predictability for both employers and employees.

The primary objective of pension risk transfer strategies is to mitigate the financial risks related to pension plans while ensuring that retirees' benefits are maintained or improved.

Types of Pension Risk Transfer Strategies

Buy-Ins and Buy-Outs

Description and Differences

Buy-ins and buy-outs are two common pension risk transfer strategies. A buy-in involves the purchase of an insurance policy by the plan sponsor to cover a portion of the pension plan's liabilities.

The policy acts as an investment that generates income to cover the pension payments. A buy-out, on the other hand, is the complete transfer of the pension plan's liabilities to an insurance company, effectively removing the pension risk from the plan sponsor's balance sheet.

Pros and Cons

Buy-ins provide partial risk transfer, allowing plan sponsors to maintain control over the plan's assets and continue managing the remaining pension liabilities. Buy-outs offer a complete risk transfer solution, eliminating the pension liabilities from the plan sponsor's balance sheet.

However, buy-outs can be more expensive and might require additional funding to facilitate the transaction.

Longevity Swaps

Definition and Mechanics

A longevity swap is a financial contract between a pension plan sponsor and an insurance company or other financial institution.

The contract involves the exchange of fixed payments from the plan sponsor for variable payments from the insurer, based on the actual longevity of the plan's participants.

This arrangement helps plan sponsors hedge against the risk of their plan members living longer than expected, which can increase the cost of providing pension benefits.

Advantages and Disadvantages

Longevity swaps offer a cost-effective solution for managing longevity risk without transferring the plan's assets or liabilities. They provide plan sponsors with greater flexibility and control over their pension plan.

However, longevity swaps do not address other risks, such as investment risk or changes in interest rates, and may require complex negotiations and pricing agreements.

Liability-Driven Investment (LDI)

Overview of LDI

Liability-driven investment (LDI) is an investment strategy that focuses on aligning a pension plan's assets with its liabilities. This approach aims to minimize the impact of market volatility and interest rate changes on the plan's funded status.

LDI involves investing in assets that closely match the plan's liabilities, such as long-duration bonds, to reduce the risk of underfunding.

Benefits and Potential Drawbacks

LDI can provide a more stable funding position and reduce the need for additional contributions from the plan sponsor. However, LDI may also result in lower investment returns, potentially limiting the plan's ability to grow assets and cover future liabilities.

Types of Pension Risk Transfer Strategies

Key Factors to Consider When Selecting a Pension Risk Transfer Strategy

Plan Sponsor's Risk Tolerance

Understanding the plan sponsor's risk tolerance is crucial in determining the appropriate pension risk transfer strategy. Different strategies offer varying levels of risk mitigation, and selecting the right approach depends on the plan sponsor's willingness to accept or manage risk.

Financial Health of the Company

The financial health of the company is a critical factor in selecting a pension risk transfer strategy.

Companies with stronger financial positions may be more inclined to pursue buy-outs or other comprehensive risk transfer solutions, while those with weaker financial positions may opt for more cost-effective strategies, such as buy-ins or longevity swaps.

Plan Demographics and Liabilities

The demographics of the plan's participants and the nature of the plan's liabilities can influence the selection of a pension risk transfer strategy. Factors such as the average age of plan members, life expectancy, and benefit structures should be considered when evaluating potential strategies.

Regulatory Environment

Regulatory requirements and changes can significantly impact pension risk transfer strategies. Plan sponsors should remain up-to-date with relevant regulations and consider their implications on potential strategies.

Market Conditions

Current and expected market conditions, such as interest rates and investment return expectations, can affect the feasibility and attractiveness of pension risk transfer strategies. Plan sponsors should consider the market environment when selecting and implementing a strategy.

Key Factors to Consider When Selecting a Pension Risk Transfer Strategy

Role of Actuarial and Financial Advisors in Pension Risk Transfer

Assessing Plan's Funded Status

Actuarial and financial advisors play a critical role in assessing a pension plan's funded status, which is crucial in determining the appropriate pension risk transfer strategy.

Evaluating Potential Strategies

Advisors help plan sponsors evaluate potential pension risk transfer strategies by analyzing their impact on the plan's funded status, investment portfolio, and risk profile.

Modeling and Forecasting

Actuarial and financial advisors use sophisticated models and forecasting techniques to predict the potential outcomes of different pension risk transfer strategies, helping plan sponsors make informed decisions.

Implementation and Monitoring

Advisors assist plan sponsors in implementing and monitoring pension risk transfer strategies, ensuring that the chosen approach remains effective and aligned with the plan's objectives.


Proactive pension risk management is essential for modern businesses to ensure the stability and sustainability of their pension plans.

Plan sponsors and stakeholders should continually evaluate and monitor pension risk transfer strategies to respond to evolving market conditions, regulatory changes, and demographic shifts.

By doing so, they can ensure the long-term financial security of their pension plans and the well-being of their plan participants.

Pension Risk Transfer Strategies FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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