Why Financial De-Risking May Leave Consumers at a Loss

The term de-risk has been appearing frequently in recent financial news. 

General Motors’ recent decision to offer lump-sum pension buy-outs to 42,000 retirees is an attempt to reduce the company’s pension obligations with the hope of returning GM to investment grade status in the eyes of rating agencies. 

Commenting on the decision, GM’s CFO Dan Ammann mentions that the “actions represent a major step toward our objective of de-risking our pension plans and will further strengthen our balance sheet and give us more flexibility.” 

MetLife’s recent decision to de-risk their variable annuity portfolio is supported by CEO Steven Kandarian’s desire to increase capital efficiency, financial flexibility and ultimately return on equity. 

During a recent conference call with analysts, American International Group (AIG) CEO Robert Benmosche discusses the benefits of de-risking the company’s variable annuity products.  The Volatility Control Fund attached to certain variable annuity products helps to de-risk variable annuity products from AIG’s perspective. 

While de-risking appears to have clear benefits for pension plan sponsors and insurance companies, financial services consumers and pension plan participants may want to consider the possibility that these gains and benefits are at their expense. 

After all, benefits do not come without a cost.  The question is what the costs might be and who is assuming the costs. 

Variable annuity and related living benefit features are becoming much less attractive.  These less rich benefits are essentially a cost that is passed along to potential buyers. 

Similarly, a lump-sum pension buyout might be much less compelling than a lifetime of pension payments. 

Financial risk does not just disappear.  One party’s reduction in risk is likely passed along in some form to a counterparty--regardless of whether the receiving party is aware of the risk transfer.

Source: Bloomberg

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