More stringent funding requirements from the Pension Protection
Act of 2006 (PPA), as well as higher pension benefit obligations (PBO) due to a
low interest rate environment, have led to an increased focus on managing
pension risk.
Liability-driven investing (LDI), which matches investments to
liability growth, has been touted for years as a way to manage that risk, but
many defined benefit (DB) plan sponsors have been looking to transfer it to
other parties altogether. Pension risk transfer can take multiple forms,
including plan freezes and terminations, as well as lump-sum payouts or the
purchase of annuities to insure benefit payment amounts.
High profile examples of companies pursuing this strategy show the
variations pension risk transfer can take. In May 2011, Hickory, North
Carolina-based Hickory Springs Manufacturing Company signed on as Prudential’s
inaugural U.S. pension buy-in client, transferring $75 million of pension
obligations to the insurance company (see “Plan Sponsors of the Year,”
PLANSPONSOR, March 2012). Stephen Ellis, Hickory Springs’ chief financial
officer, notes that there is no other investment choice 100% guaranteed to
match liabilities. “We feel really good that we’ve maintained the culture that
we take care of employees, even after retirement,” he says.
In June, General Motors announced that it was offering 42,000
salaried retirees and surviving beneficiaries voluntary, single lump-sum
payment options. Since then, a flurry of pension plan sponsors has been
offering lump sums.
In October, the Prudential Insurance Company of America signed an
agreement with Verizon Communications Inc. to transfer approximately $7.5
billion of the Verizon Management Pension Plan obligations to Prudential. Upon
closing—expected in December—the Verizon Management Pension Plan will purchase
a group annuity contract from Prudential. The insurer will assume
responsibility for making payments to the retirees covered by the
agreement—approximately 41,000 Verizon Management Pension Plan participants who
retired and started receiving pension benefits before January 1, 2010.
“The size of the pension settlement actions announced in 2012 is
redefining the market,” notes Ari Jacobs, senior partner and Global Retirement
Solutions leader at Aon Hewitt. “In the U.S., the entire volume of pension
liabilities annuitized in recent years has been about $1 billion per year, and
no single transaction has exceeded $1 billion since the 1980s. The transactions
by Verizon and GM are orders of magnitude larger than this and likely to be
important in the continuing trend in pension de-risking and settlement
strategies.”
Ed Root, vice president of U.S. Pension Risk Transfer for MetLife,
says interest in de-risking among plan sponsors will continue to grow. Since
the enactment of the PPA—when accounting standards changed to mark-to-market
accounting, reflecting a company’s current financial situation—not to mention
the 2008 market crash and the decrease in long-term interest rates, MetLife
clients found themselves wondering what to do about their pension plans.
Clients were finding they had to invest money, not in the core business, but in
the company pension plan.
Glenn O’Brien, managing director and head of distribution and
client management for Prudential’s Pension Risk Transfer business, adds that
Prudential is seeing more plan sponsors interested in pension risk transfer so
they can focus on their business. He anticipates more transactions in the
future.
Sponsors looking to transfer pension risk should keep in mind the
following five considerations: