How To Play An Enormous Trend Happening In Pensions

In a new report, Citi analyst Erik Bass looks at a potential crisis on the horizon for global pensions. An aging global population will be placing a huge strain on underfunded public and private pension systems in the next five to 10 years. Bass believes that corporate pension funds will be committing a lot of effort to de-risking in coming years, a trend that could prove very beneficial to insurance companies.

“We see pension closeouts as an opportunity for insurers to deploy meaningful capital at attractive returns (12-14% ROEs in the US, double-digit IRRs in Europe),” Bass explains. Citi projects that pension risk transfer will represent a $750 billion opportunity worldwide.

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Bass sees insurers as uniquely-positioned to provide individuals with products that will produce guaranteed income for life.

Aegion Corp AEGN, a leading pension provider in the U.S., U.K. and Netherlands, is one of Citi’s top pension stock picks. The stock currently trades at only 7x Citi's projected 2016 earnings.

Bass’ other top stock pick is Prudential Financial Inc PRU. He estimates at least 13 percent ROEs for the annuity leader and notes the stock's compelling risk/reward balance at just 7x 2016 earnings.

In addition to those top picks, Citi believes that Principle Financial Group Inc PFG could also be a long-term beneficiary from the pension theme.

Disclosure: the author holds no position in the stocks mentioned.