Two more large corporations have decided to transfer their pension plans and the attendant obligations to a major life insurance company, a move that has become increasingly popular in the wake of accounting, regulatory changes, and volatile securities markets.
Motorola Solutions and Bristol Myers Squibb have each reached agreements to shift pension obligations totaling $4.5 billion and impacting 38,000 employees to Newark-based Prudential Financial. Scott Kaplan, senior vice president of global product and market solutions for pension and structured products at Prudential, noted pension transfers present a win-win situation for the companies, their employees and the insurer, assuming the company can afford the transfer premium.
“Companies have to think about pension funds through a risk management lens,” Mr. Kaplan said, noting even fully funded pension plans face significant risk if they’re not matching their assets and liabilities properly.
Kaplain said that in approaching prospective companies, Prudential points out that corporate pensions lost at least 30 percent of their funded status—the difference between assets and liabilities—when the stock market bottomed out and interest rates fell in 2003, and then again in the wake of the 2008 financial crisis. Such a mismatch in the funded status can pummel the cash flows necessary to support obligations to beneficiaries.
“As a result of those two downturns, significant plan sponsors had to contribute $572 billion to their pension plans over the course of 11 years,” even though at the start of that period they were significantly overfunded, Mr. Kaplan said. He added that an accounting change at the end of 2006 that required companies to report pension obligations in their financial statements, and the Pension Protect Act of 2006 that required full funding of pension deficits over a 10 year period, were also factors. Since 2012, Prudential has also completed major transfers, each over $1 billion in assets, from General Motors and Verizon, as well as numerous smaller companies.
The handful of major insurers in this space that work with large corporates, MetLife, MassMutual Financial Group and Pacific Life, are experts in matching assets and liabilities—that expertise is the heart of the insurance business. In addition, by shedding their pensions corporates eliminate the fees they would otherwise pay to outside managers (insurers’ internal teams typically manage their assets) as well as the Pension Benefit Guaranty Corp. (PBGC), which recently avoided having to hike fees but could do so at virtually anytime.
Jeff Wallace, managing partner at Greenwich Treasury Advisors, said another hurdle facing corporate pension plans is longevity risk, since the mortality plans most corporate pensions use are 20 years old or more. “People are now living two or three years longer than what their mortality tables indicate, and that’s terribly costly,” Mr. Wallace said.
Mr. Kaplan said Prudential makes current assumptions on how long people will live, requiring companies to pay a premium on the fully funded plan they’re transferring to Prudential. However, that’s a one-time cost, while beneficiaries will continue to receive full payments under a group annuity contract.
Prudential retains its A+ superior rating from A.M. Best, and it holds ratings from Standard & Poor’s and Moody’s of AA- and A1, respectively, credit ratings few corporates can match.
Mr. Kaplan noted that many corporate pension plans are 70 percent or 80 percent funded, and while they’re backed by the PBGC, it currently is underfunded. “Would you prefer that situation, or going with a highly rated insurance company?” Mr. Kaplan said.