A case study of Prudential’s pension risk transfer businessAugust/September 2018
Since 2009, I have had the privilege of being a leader in the Pension Risk Transfer (PRT) team at Prudential Financial. In this business, we help pension funds in the United States proactively manage investment and longevity risk, and create retirement security for their members by insuring their pension risk. We also reinsure pension risk for insurers outside of the United States. During nearly a decade of focus and effort, our team has:
- Attracted, developed and retained the finest talent.
- Studied the real unmet needs of our prospective clients.
- Delivered significant innovation that transformed our industry.
- Achieved top sales and honors in our chosen markets.
- Managed risk effectively.
- Delivered significant profitable growth.
- Set our sights on another decade of innovation and success.
This article describes who we are, what we have accomplished and how we have incorporated diversity and inclusion into the very fabric of our business. After reading this article, you will be armed with tools and best practices you can apply and nurture among teams in your business, whatever business that may be. With specific hiring practices, training, team building, goal setting, accountability and feedback, a diverse and inclusive team can achieve differentiated results in innovation, growth and profitability.
The PRT Team at Prudential Financial
We are a pension leader and have built our flagship PRT business on one of the world’s strongest insurance and asset management platforms, bringing together the core capabilities required to succeed. Together with our colleagues across Prudential, we have provided integrated pension plan services since 1928 and have grown to:
- The second-largest active institutional manager of domestic fixed income1
- The third-largest institutional money manager for defined benefit plans,2 managing assets for 23 of the 25 largest corporate funds3
- The largest manager of U.S. pension buy-outs,4 having completed nearly $50 billion in transactions for many household names
- The leading reinsurer of pension longevity risk, with $50 billion reinsured since 20115
Many in our industry know what we have done, but very few know how we did it. In fact, the single most frequent question I hear from clients, competitors and colleagues is wondering exactly how we achieved our results.
We did all the typical things required to succeed in business: long-range strategic planning, plotting the disruption of our own market, finding the right people with the right mix of skills, persevering through many setbacks, thoughtfully approaching each important opportunity and building a resource base aimed at our breakout goals. These steps alone explain some of our success, but not all of it. There is an important intangible that our team has carefully cultivated since long before it was fashionable. Our secret is diversity and inclusion. Our success proves that what is right for our people is nothing short of fantastic for the bottom line.
A Clear Business and Talent Strategy
The timeline in Figure 1 shows the steps we have taken to build the PRT business. We’ve insured/reinsured nearly one-third of global pension risk activity since 2011.6 Though Prudential completed its first pension buy-out in 1928 for the Cleveland Public Library, the U.S. market was very small through the beginning of this century, producing less than $3 billion per year in volume. In 2006, as the Pension Protection Act was making its way through Congress, more stringent funding rules combined with mark-to-market accounting on the balance sheet promised to make pension de-risking a significant market opportunity. In response, Prudential established a core team in 2007 to explore emerging PRT solutions in the United Kingdom and adapt and modernize the business for U.S. market growth. However, the financial crisis intervened and decimated pension funds in the United States, bringing the average funded status from 108 percent of liabilities to 74 percent7 and diverting the industry’s attention to recovery.
Figure 1: Prudential’s Global Pension Risk Transfer Milestones
First pension buy-out contract: Cleveland Public Library
Global pension risk transfer opportunity identified
Established core team
Explored emerging U.K. solutions
Adapted/modernized for U.S. market growth
Applied U.K. longevity underwriting best practices
First U.S. pension buy-in, Hickory Springs $75 million
Entered longevity reinsurance market; First deal with Rothesay Life
General Motors $25 billion buy-out
Verizon $7.5 billion buy-out
British Telecom $28 billion captive longevity reinsurance
“Deal of the Year”
Named top innovator by CIO magazine in Corporate Liability Strategies for the fourth time
“Reinsurer of the Year” for the third consecutive year
Flow reinsurance for small buy-ins and buy-outs
MMC UK Pension Fund $4.3 billion captive longevity reinsurance
“Reinsurer of the Year” for the fourth consecutive year
While many U.S. firms reduced their commitment to the market in 2008 and 2009, Prudential’s U.S. team took a contrarian view. We doubled down, believing the two major market disruptions that opened this century (the dot-com bust and the financial crisis) would cause companies to pursue pension de-risking with renewed commitment when they could afford to do so. Since our clients had a significant challenge that needed solving, we focused on the work of building the team and the capabilities that would be needed for the future.
Adapting Best Practices From Across the Pond
In 2009, we adopted the best practices in longevity underwriting that were actively used in the United Kingdom, including the use of postal code modeling to establish the socioeconomic group and life expectancy of the pensioners. This investment would not have made sense with the market under $3 billion per year, but it would pay off if we could move the market into a period of aggressive growth. At the same time, we started educating plan sponsors about pension risk and building two new product offerings. The first was a U.S. pension buy-in product, which would allow a pension fund to de-risk without any adverse accounting impact. This effort succeeded in 2011 when our team completed the first U.S. pension buy-in transaction. The second new product offering was international longevity reinsurance, which we pursued because of robust demand from the rapidly growing U.K. market—a market that led the world in pension de-risking. The opportunity to reinsure U.K. risk would allow us to grow profitably and learn as an active participant in the most advanced market in the world. This effort also succeeded in 2011 when we completed our first longevity reinsurance transaction for Rothesay Life in the United Kingdom.
Throughout 2009, 2010 and 2011, we cultivated large U.S. pension buy-out opportunities and prepared our teams for these transactions. In 2012, these efforts succeeded with the $25.2 billion General Motors transaction and the $7.5 billion Verizon transaction. The sheer size of these deals caused us to rethink everything about the business—from the form of contract to the in-kind transfer of assets to the manner in which the participants would be onboarded. We approached these transactions with all members of our multidisciplinary team fully engaged in collaborative problem-solving. The team was respectful and inclusive, giving each member the courage to bring his or her best to the table every day. Each time we ran into a challenge, someone on the team came forward with an idea that often was improved upon as everyone considered and contributed to the discussion. Every member of the team has been responsible for solving major challenges that arose along the way, proving the power of inclusion for innovation in business.
2013 was a quiet year in the market, but a very busy year for us at Prudential. Having launched our domestic PRT and international longevity reinsurance businesses and proven the possibility of aggressive growth, we used this time to plan and build. We added diverse talent in nearly every team to build out our distribution, underwriting, pricing, reserving, modeling, portfolio management, product management, finance, legal, risk, operational, compliance and transactional teams. A key goal in this expansion was to make sure we could succeed in the domestic and international markets simultaneously, while maintaining a sustainable pace to avoid burnout and turnover. This investment in diverse talent paid off in 2014 when we completed the largest and—at the time—most innovative longevity risk transfer in the history of the market, covering $28 billion of pensioner liabilities for the British Telecom Pension Scheme. In the very same year, we were able to manage several important transactions in the U.S. market, including pension buy-outs for Motorola Solutions and Bristol-Myers Squibb.
The success continued in 2015, 2016 and 2017, with many more noteworthy transactions, including Philips, Kimberly-Clark, JCPenney, WestRock, United Technologies and International Paper.
The Competitive Advantage of a Diverse and Inclusive Team
While our financial strength and capital have been fundamental to this record of success, we do compete with similarly situated firms. As such, strong ratings, healthy surplus and significant risk-taking ability matter a great deal, but they are not unique to Prudential in the PRT business. What is unique to Prudential is the quality of our people.
Our team was built to have deep expertise across multiple disciplines, including defined benefit (DB) pensions, insurance product management, longevity underwriting, product pricing, portfolio management, collateral management, finance, treasury, law, compliance, risk management, tax, accounting, reserving, operations and technology. Many of our professionals joined our team from other firms or other parts of Prudential, bringing diverse work experiences and backgrounds to the table.
There are many other dimensions of diversity that were carefully cultivated in our team. More than half of our employees are women and, as shown in Figure 2, we have broad representation by generation, geography and tenure. It has also been very important to welcome people of color, members of the LGBTQ community and people from all over the world (as shown in Figure 3). A diverse talent strategy is a great starting point for any business in building toward inclusion and success in innovation.
Figure 2: Prudential Pension Risk Transfer Team:
Representation by Generation, Geography and Tenure
Source: Prudential Retirement as of March 31, 2017.
Figure 3: Prudential Pension Risk Transfer Team: Countries of Origin
Source: Prudential Retirement as of March 31, 2017.
Many members of our team have spent more than 20 years in the financial services industry and many brought experience and credibility in the pension market, which grew considerably as each innovation succeeded and each new transaction was announced.
The ability to transform our industry and sustain our success year after year and transaction after transaction came from the power of the collaboration within this diverse, multidisciplinary team. In almost every transaction, our clients would present new challenges and require customization to tailor a PRT solution to meet their needs. No matter what hurdle or issue arose, our team was consistently able to engage in open and transparent dialogue, sharing observations, concerns and ideas to build on proven structuring skills. To this day, we are still structured to engage as a team, with every discipline represented when planning how to bring forward our strategy, and when something new or innovative is being considered. This collaboration and inclusion has enabled us to find prudent approaches, controls and boundaries for innovation. We have consistently seen that the best way to find problems before they arise is to bring together this powerful and inclusive team and empower everyone to speak up, whether the issue is an anomaly in the data or a new benefit we have not previously covered. Part of our commitment to one another is to voice concerns for the group to resolve. The result has been a track record of successful execution. This inclusive environment can be created in any group of colleagues.
Once on our books, a PRT transaction can last for 50 years or more. For onboarding clients and working with beneficiaries, we have always understood that our culture of excellent service would be a source of competitive advantage and sustainable growth. We invested and continue to invest in operations, administration and technology. Moreover, representatives of these areas are active and important members of the transaction teams to ensure that our high standards for execution can be consistently met.
Taken together, the combined efforts of this diverse and inclusive team to innovate, execute and manage risk have driven significant growth in sales and earnings. Our account values have grown at a 25 percent annual rate from $30 billion at the end of 2011 to $93 billion at the end of 2016. Moreover, we expect to produce internal rates of return (IRRs) at or above our targets on all new business written, and the business mix is prudently diversified with good underwriting performance on the existing book.8
Diversity and Inclusion Fuel Success
The business case for diversity and inclusion has been championed by Prudential’s senior leaders and rooted in our core values. Prudential Retirement President Phil Waldeck has said, “Diversity defines how Prudential is successful and how we make an impact externally and on each other.” It has allowed us to build a sustainable competitive advantage by creating the necessary conditions for innovation and risk management in an engaging environment that is better for our employees, customers and shareholders. Waldeck has also said, “Bringing our best requires a broad range of thinking, and to have this we need a broad range of backgrounds.”
Diversity alone is not enough. To unleash the collaborative power of your people for innovation, risk management or any significant undertaking, you also need inclusion—which is harder to achieve than diversity alone. To realize both requires intentional focus and specific practices in:
- Recruiting and hiring
- Training and development
- Performance management
For many years, we have had strict requirements to post opportunities and have been required by the highest levels of senior management to consider a diverse slate of final candidates for every open role. These practices move the needle because each hiring manager is held accountable and will need to explain a failure to meet expectations at the C-suite level. Leaders also have been supported through the years with excellent training on diversity, including the many dimensions of diversity depicted in Figure 4.
Figure 4: Dimensions of Diversity
Click Image to Enlarge
Adapted from: Loden, Marylin, and Judy B. Rosener. 1991. Workforce America! Managing Employee Diversity as a Vital Resource. New York: McGraw‑Hill. Gardenswartz, Lee, and Anita Rowe. 2003. Diverse Teams at Work: Capitalizing on the Power of Diversity. Alexandria, VA: Society for Human Resource Management.
This training has been focused on recognizing and overcoming bias, but it goes well beyond that to help teams and leaders understand the business value of diversity of thought. Leaders are taught to ask a number of key questions, all of which can be used in any business.
- Do they have a preconceived notion of how a project or opportunity should be pursued and how it will end? Do they state their view first, or last after considering input from others?
- Do they seek the views of a few or of many? Is every member of the team comfortable enough to speak up if they disagree or spot a challenge?
- Is active engagement, collaboration and problem-solving happening in front of the whole team?
- What does disagreement on the team look like? Is it respectful? Is everyone listening?
- Are people thanked for bringing challenges to light?
- Does the leader offer the opportunity for high-profile projects to the same people time and time again, or is opportunity broadly shared across the team?
- Does the leader communicate clear standards to all?
- Does the leader take the time to have one-on-one conversations or meetings to give ongoing feedback and guidance to all employees?
Since leadership is learned, this support is instrumental in helping leaders be thoughtful about improving team climate and performance. Moreover, since a company’s single biggest investment is in its people, cultivating strong leaders who position their team members to consistently deliver their best is simply good business.
Investing in a Diverse and Inclusive Team
In addition to leadership training, one of the most powerful ways we have invested in our diverse talent is by establishing a teaching culture with a robust learning program. Every new hire is welcomed into our team with an in-depth set of courses taught by our business leaders. We cover everything from our products and markets to transaction terms and the financial considerations behind our business. Another SVP and I teach the first course in the program quarterly. This allows all new hires to meet us and become comfortable with the business leaders right away. We never fail to talk about our vision for the team and why diversity and inclusion are fundamental to our success. We also ask our new hires to use their fresh perspectives and experiences to ask questions and voice concerns, and to later be generous with their time and teach others. In addition to the new-hire training program, we have a vibrant “lunch and learn” series and an annual learning day. We also offer leadership training and tuition reimbursement.
Offering training and professional development to all is a fundamental cornerstone of creating a diverse and inclusive team. Where there is a vibrant meritocracy, full of opportunity for development, people bring their best every day. This is the crucial link between diversity and fostering the sustainable competitive advantage, the impact of which is evident on the bottom line.
Finally, performance management and accountability may be the most important part of bringing diversity and inclusion successfully into a business environment. People focus on business objectives that are enumerated in their individual goals, and where there is a direct connection to their performance rating, compensation and opportunity for advancement. Since diversity and inclusion are proven to positively affect business results, each person has a diversity and inclusion objective and is held accountable for fulfilling it. A failure to meet a diversity and inclusion objective must have just as big an impact on a person’s performance rating, compensation and opportunity for advancement as missing any other important goal in our business.
The diversity of the team contributes to a sustainable competitive advantage because:
- We are able to attract top talent from firms that are not inclusive.
- Diversity of thought and experience is important in effective collaboration, innovation and risk management.
- Our team reflects the diversity of decision makers in the pension industry as well as our policyholders.
- Our team brings language skills, cultural agility and an understanding of other countries where we may seek to reinsure risk.
It can be a challenge to integrate so many perspectives. We have addressed this challenge by developing a very clear decision-making framework and specifying who is responsible, accountable, informed and consulted in each matter.
Diversity Is for All of Us
Too often today, the focus on diversity is narrowly defined and its value is underappreciated or unknown. For those just beginning this journey, it may help to start with a focus on building greater diversity in a team by gender and race, but it is important to very quickly add to these dimensions with age, ethnicity, disability, sexual orientation, country of origin, military service, educational training, professional experience and many more attributes. When a team truly embraces diversity across its many dimensions, diversity is for all of us. When fully incorporated in recruiting and hiring practices, training and development, and goal setting and performance management, it can unleash the right climate for inclusion and the intangible that allows the team to attract and retain the best talent, thrive, collaborate, innovate, grow and manage risk.
Copyright © 2018 Prudential Financial Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial Inc. and its related entities, registered in many jurisdictions worldwide.
- 1. “Largest Money Managers: 2017.” 2017. Pensions & Investments. May 29. ↩
- 2. Ibid. ↩
- 3. According to U.S. plan sponsor rankings in Pensions & Investments (data as of Dec. 31, 2017, published March 2018). ↩
- 4. LIMRA Group Annuity Risk Transfer Survey, 1Q 2018, based on assets. ↩
- 5. Data from Prudential Retirement as of Dec. 31, 2017. ↩
- 6. Prudential analysis of market volumes in Canada, United Kingdom and United States as of Dec. 31, 2017. ↩
- 7. Milliman 100 Pension Funding Index: The 100 Largest U.S. Corporate Pension Plans. ↩
- 8. Prudential Financial. 2017. 2017 Investor Day. June 6. ↩