A risk-transfer event occurs when a company takes action to reduce or eliminate its pension benefit obligations by shifting financial risk away from itself and onto plan participants or insurance companies.
In today’s retirement landscape, many employers are looking for ways to manage the long-term cost and uncertainty of traditional pension plans. A risk-transfer event is one of the most common strategies used to achieve that goal. Understanding how it works can help employees and retirees make better decisions about their retirement income.
Understanding a Risk-Transfer Event in Simple Terms
A risk-transfer event happens when a pension plan sponsor—usually a company—moves the responsibility for paying future pension benefits off its own balance sheet. Instead of the company directly paying retirees over many years, it transfers that obligation elsewhere.
This is often done in one of two ways:
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Offering participants a lump-sum payment instead of a lifetime pension
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Purchasing an annuity from an insurance company to replace the company pension
Both options reduce the employer’s ongoing pension risk, but they affect participants in different ways.
Lump-Sum Offers and Participant Choice
In many risk-transfer events, eligible participants are given a choice. They can either:
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Take a one-time lump-sum payment now, or
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Decline the lump sum and receive a monthly annuity payment later
If a participant chooses the lump sum, the company’s pension obligation for that person ends immediately. The participant receives the money and becomes fully responsible for managing it.
This option may appeal to people who want flexibility, control, or the ability to leave money to heirs. However, it also comes with important risks.
Risks Shifted to Participants
When someone accepts a lump-sum payment during a risk-transfer event, they take on risks that the pension plan previously handled.
These risks include:
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Longevity risk – the risk of outliving the money if it is not managed carefully
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Investment risk – the risk that poor investment choices or market downturns reduce retirement savings
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Inflation risk – the possibility that rising prices erode purchasing power over time
In a traditional pension, the company bears these risks. After a lump-sum payout, the individual must manage them alone.
Annuity Purchases and Insurance Companies
If participants decline the lump sum, the company often completes the risk-transfer event by buying annuities from an insurance company. The insurer then becomes responsible for making the future pension payments.
From the participant’s perspective, monthly payments usually continue as expected. However, the payer changes—from the former employer to an insurance company.
This approach transfers:
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Payment responsibility
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Longevity risk
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Investment risk
away from the employer and onto the insurer, which specializes in managing long-term obligations.
Why Companies Use Risk-Transfer Events
Companies pursue risk-transfer events for several reasons:
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To reduce pension-related volatility on financial statements
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To lower administrative and regulatory burdens
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To better predict long-term costs
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To focus resources on core business activities
Managing pension obligations can be expensive and uncertain, especially as people live longer and markets fluctuate.
Real-Life Example
Imagine a manufacturing company with a closed pension plan. To reduce future obligations, it offers retirees a lump-sum option. Some participants accept the payout and roll it into an IRA. Others decline and continue receiving monthly payments, now funded through an insurance annuity.
In both cases, the company successfully reduces its pension risk—either by paying out benefits immediately or by transferring responsibility to an insurer.
Why Risk-Transfer Events Matter to You
For participants, a risk-transfer event is more than a corporate finance decision—it directly affects retirement security. Understanding what is being offered, what risks are changing hands, and how those risks fit your personal financial situation is essential.
In simple terms, a risk-transfer event shifts responsibility. Whether that responsibility moves to an insurance company or directly to you depends on the choice you make—and that choice can shape your retirement for decades.
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Learn what a risk-transfer event is, how pension lump sums and annuities work, and what risks shift to retirees in simple terms.
