A New Role for Captives in Pension Risk Transfer

For many plan sponsors, pension risk transfer has traditionally meant purchasing annuities from a commercial insurer. While annuity transactions remain an important solution, plan sponsors now have an additional framework for executing certain pension risk transfer transactions. In 2025, Memorial Sloan Kettering Cancer Center (MSK) received approval from the Department of Labor to transfer pension obligations through a captive insurance arrangement, creating one of the first approved frameworks of its kind for a U.S. pension plan.

Under the structure, a commercial insurer issues the annuity contract and then reinsures the obligation to the sponsor's captive insurance company. The arrangement seeks to achieve many of the objectives of a traditional annuity transaction through a different risk transfer framework. Captive structures have long been utilized in other areas of risk management, but their application to U.S. pension risk transfer has historically been limited.

Why Has This Generated Interest?

At its core, the concept is driven by economics. Public information related to the MSK transaction estimated economic benefits exceeding $120 million for a pension plan with approximately $1.3 billion in assets. While results will vary based on plan demographics, funded status, investment strategy and transaction design, the transaction demonstrates the scale of economic benefits that can be associated with a captive structure.

Potential benefits may include lower transaction costs, the elimination of future PBGC premiums and certain administrative expenses and greater control over assets supporting the obligations. Together, these factors may reduce pension-related volatility while improving the overall economics of a pension risk transfer transaction.

Finally, these economic benefits must be shared with plan participants. The potential savings can be passed to plan participants through pension benefit increases to directly increase the value of annuities provided to retirees.

Which Plans May Be Good Candidates?

That does not mean captive risk transfer is appropriate for every sponsor. Traditional annuity purchases will likely remain the preferred solution for many plans. However, certain plan characteristics may make a captive structure worth exploring, including:

  • Existing captive insurance infrastructure and governance framework
  • Well-funded pension plans with a clearly defined endgame strategy
  • Meaningful surplus assets that may support pension settlement or termination objectives
  • Material allocations to less liquid investments
  • Interest in reducing pension risk while maintaining greater oversight of assets supporting the obligations

The Importance of Liability-driven Investing

Beyond the transaction itself, the emergence of captive structures highlights a broader principle that applies to both pensions and captive insurance arrangements: liabilities matter. Whether obligations remain in a pension trust, are transferred to an insurer or are supported through a captive, the focus remains the same, aligning assets with future benefit obligations.

As a result, many of the principles associated with liability-driven investing remain relevant regardless of the chosen structure. Understanding projected cash flows, interest rate sensitivity, liquidity needs and funded status can help sponsors evaluate both risk transfer opportunities and ongoing risk management decisions. The same asset-liability framework used to manage pension plans can often provide valuable insights when assessing the assets intended to support obligations within a captive arrangement.

Even for sponsors that ultimately decide not to pursue a captive solution, the evaluation process itself can be valuable. Maintaining accurate participant data, understanding settlement populations, assessing liquidity needs and aligning the investment strategy with long-term liability objectives can create flexibility regardless of the ultimate path selected.

For many plan sponsors, traditional annuity transactions will likely remain the preferred path for reducing pension risk. However, captive structures demonstrate that plan sponsors have additional ways to achieve pension risk transfer objectives. Whether a sponsor ultimately pursues a traditional buyout, a captive structure or another endgame strategy, a clear understanding of liabilities and an investment strategy aligned with those obligations remain critical to achieving long-term objectives.