Feature | Published in November 2012

Risky Business

5 considerations for transferring pension risk

By Rebecca Moore | November 2012
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JooHee Yoon

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: