Pension Risk Transfers Leave Pensioners Vulnerable

This transfer is part of the growing wave of pension risk transfers to insurance companies.

Lifelong Unisys workers have now swapped Unisys risk for pure financial intermediation risk via F&G insurance. F&G will assume the risk of the Unisys pension. This follows similar transactions by ATT, Verizon, PSEG and others (ATT who transferred their pension to Apollo's Athene is being sued by their pensioners).

As long as F&G's assets are rock solid, this may not increase the risk to Unisys' pensioners. However, this is not the case.

What does F&G's asset base look like?

F&G's second largest investment exposure is structured securities of which 70% are CMBS and CLOs. Their CLO exposure is largely comprised (70%) of low and below investment grade CLOs. Within CMBS they have large exposure to two risky segments (Single Asset or SASB and CRE CLOs) that I and others have flagged as having significant downgrade and default risk.

F&G also has large exposure to private credit.

If a large part of F&G's assets have inflated ratings, their National Association of Insurance Commissioners (NAIC) risk ratings will be inflated which in turn means their risk based capital may be inflated.

Many of the above investments are vulnerable to rapid ratings deterioration - in an extreme case leaving Unisys and other F&G creditors left in the lurch.

When I was at PIMCO, the NAIC hired my team to lead the largest post-financial crisis example of replacing formal credit ratings with quantitative risk metrics in setting the capital of insurers. It's time for the NAIC to continue to review their reliance on credit ratings in setting risk capital - especially in segments where the ratings may not reflect true risk (EG SASB CMBS and CLOs).

Finally, the Pension Benefit Guaranty Corporation (PBGC) may be focusing on these risk transfers as they will ultimately bear the risk.

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