Pension risk transfer scrutiny stems from 'misconception' – Athene exec

➤ The appetite for pension risk transfer deals among private equity firms has grown in recent years.

➤ Recent transactions involving private-equity-backed companies have drawn scrutiny from lawmakers in Washington.

S&P Global Market Intelligence recently caught up with Richard McEvoy, who is senior vice president and pension group annuity leader at Athene Holding Ltd., to discuss opportunities for insurers in the pension risk transfer space and to address the recent congressional scrutiny into the growing role of private-equity linked companies in the market.

Athene has been active in the pension risk transfer space since it entered in 2017. The company had the largest share of disclosed deals in 2021, with five transactions totaling $10.10 billion in obligations transferred.

The following conversation was edited for clarity.

S&P Global Market Intelligence: What are some of the benefits of pension group annuities for insurers?

Richard McEvoy: There are three stakeholders involved here: insurers, plan participants who are the ultimate beneficiaries, and employers. Pension group annuities … has been a very big growth area globally for the insurance market over the last 10 years and will be a continued source of growth given that the total pension group annuity market is pretty small relative to the addressable market. In the U.S. alone, the total corporate defined benefit market is $3.5 trillion. It represents a great opportunity for growth for insurance companies.

I would also say they are pretty reasonably predictable, stable liabilities relative to some of the other liabilities that insurers have taken on over the years that have caused serious problems. For instance, variable annuities with income riders caused havoc in the insurance market in a low rate environment, though Athene does not touch those obligations.

Pension group annuities are far more predictable and straightforward. They are very attractive sources of growth and predictability. Insurance companies, and Athene in particular, are very well equipped to cater to the needs of retirees, from a participant financial security standpoint. Annuity servicing and financial risk management is very much something insurers do and not so much in the wheelhouse of corporate sponsors.

Many pension plans out there are underfunded and underhedged. Insurers are obligated to fully fund, hedge and capitalize annuity obligations. We would say that participants are in better shape with insurance companies.

How has inflation and the possibility of a recession impacted the appetite for taking on these obligations?

First off, pension plans have actually benefited from rising rates because they reduce the value of obligations.

The result is that funding levels have increased substantially since the start of the year; they increased substantially during 2021 as well. Higher inflation and the resulting rising rates have led to higher funding levels, which means that sponsors are now better equipped to execute pension risk transfer transactions than were in the past. That has actually been a tailwind to the pension risk transfer business.

Recession fears and volatility in general proposes a very good investment opportunity for Athene in particular, given that we tend to lean into volatile environments in terms of the types of assets we invest in to capture value and generate long-term returns. There is quite a tailwind in terms of potential returns that we can generate and the pension risk transfer premiums we can offer to employers.

I think the market is quite fertile both in terms of increasing funding levels that affect all sponsors and insurers.

So would you characterize the appetite for pension risk transfers as strong?

For sure, and I anticipate that it will only get stronger.

Athene has been involved with several pension risk transfer deals with Lockheed Martin, including a $4.9 billion deal in 2021. What has the impact of those deals been like?

One of the things those deals demonstrate is the trend among many sponsors to execute multiple transactions in successive years. Athene has several repeat customers. When sponsors and participants benefit from us, they come back for more, if you will. We have seen that again and again. Many sponsors have undertaken smaller transactions with us that then migrate into larger transactions.

I'm sure you're aware of some recent congressional scrutiny on private-equity-backed companies and the pension risk transfer market. Do you feel this scrutiny is warranted?

That's a loaded question, but a lot of this has to do with communication and understanding in my view. It is certainly not a bad thing for regulators and other stakeholders to have a better understanding of the insurance market and its drivers. But there are some misconceptions in terms of the private-equity-backed insurers.

The partnership between Athene and Apollo Global Management Inc. is very much long term. We are very integral to each other.

One of the misperceptions that is out there is that private equity firms are involved in the insurance market in order to make money fast and turn things around quickly. But Athene and Apollo, for example, have been tightly tied together for a decade or so. It's very much a long-term commitment.

Apollo's expertise in retirement services asset management gives us a competitive advantage through its alpha-generating portfolio management and structuring, M&A sourcing and operational support. We believe that alpha has been wrung out of public fixed-income markets, and with the largest alternative credit manager globally, we are well positioned to enhance the economics of pension risk transfer transactions without taking on additional risk.