Pension Risk Transfer: How Corporate America Is Managing Defined Benefit Liabilities

Transcription

1 Pension Risk Transfer: How Corporate America Is Managing Defined Benefit Liabilities September 20, 2017 Cynthia Shoss, Partner and Co-Head of Global Insurance Brian Barrett, Partner Adam Cohen, Partner 2017 (US) LLP

2 What is De-Risking? Manage Risk: Plan Re-design ALM Strategy Interest Rate Hedging Transfer Risk: Pay Lump Sums Purchase Annuity(ies) Plan Termination 2

3 Examples of Pension Risk Transfers Accenture (2017) $1.6 billion 9,200 retirees Sears (2017) $515 million 51,000 retirees The Hartford (2017) $1.6 billion 16,000 retirees United Technologies (2016) - $1.77 billion 36,000 retirees WestRock (2016) $2.5 billion 35,000 retirees Kimberly-Clark (2015) $2.5 billion 21,000 retirees Philips Electronics (2015) - $900 million 19,000 retirees Motorola (2014) $3.1 billion 30,000 retirees Bristol-Myers Squibb (2014) - $1.4 billion 8,000 retirees General Motors (2012) - $26 billion 110,000 retirees Verizon (2012) $7.5 billion 41,000 retirees 3

4 PBGC Premiums Plan Year Per Participant Flat Rate Variable Per $1000 UVB Per Participant Cap 2019 $80 $42* $500* 2018 $74 $38* $500* 2017 $69 $34 $ $64 $30 $ $57 $24 $418 *Subject to indexing 4

5 Evaluating a Retiree Buy-Out Economic Value of Re/ree Liability (in Millions) 5

6 Transaction Parties 6

7 Illustrative Timeline (Beginning With Final RFP) 7

8 PRT Structure Complete plan termination PBGC process Plan and trust eliminated entirely Lift-out Plan remains in effect Generally no PBGC process Liability extinguished by virtue of the participant no longer having a benefit under the plan Buy-in More popular outside the United States Liability not extinguished Insurer assumes investment and longevity risk Sponsors sometimes engage in spin-off transactions under which part of the plan is spun-off and a buy-out is effected with respect to the spun-off plan, which is then terminated. 8

9 Ongoing ERISA-Related Requirements Annuity Contract Terms Term vested Irrevocable Enforceable by the participant Nontransferable, nonassignable QDROs Spousal consent Election information including relative value RMD/70.5 9

10 Selecting an Annuity Provider Background PRT decision is settlor, but ERISA s fiduciary duties apply to the selection of an annuity provider Duty of loyalty (exclusive purpose) Duty of prudence Duty to diversify Duty to follow plan documents Do not act with a conflict of interest Prohibited transactions 10

11 Selecting an Annuity Provider Interpretive Bulletin 95-1 Plan fiduciaries choosing an annuity provider must take steps calculated to obtain the safest annuity available unless it would be in the interests of participants to do otherwise To determine the safest annuity available, plan fiduciaries should conduct an objective, thorough and analytical search Reliance solely on insurance ratings is not sufficient There may be multiple safest available annuity providers 11

12 Selecting an Annuity Provider Interpretive Bulletin 95-1 The types of factors a fiduciary should consider include: Quality and diversification of the investment portfolio Size of the insurer relative to the proposed contract Level of the insurer s capital and surplus Lines of business of the annuity provider and other indications of an insurer s exposure to liability Structure of the annuity contract and guarantees supporting the annuity (such as the use of separate accounts) Availability of additional protection through state guaranty associations and the extent of their guarantees 12

13 Selecting an Annuity Provider Considering an Independent Fiduciary Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert Fiduciaries must be aware of their potential conflict of interest and consider an independent advisor Independent fiduciary structure Fully discretionary Expert advisor Co-decision-maker 13

14 Pension Risk Transfer has unsurpassed breadth and depth of experience in the pension de-risking market. Our team has advised on bulk group annuity/pension risk transfer and longevity deals ranging in size from a few million to multi-billion, and in complexity from market standard to bespoke collateralized structures. We have acted on some of the largest pension risk transfer deals in the UK and US and have experience across the Irish, Dutch and Canadian markets. Our clients in some deals are insurers, including new market entrants. In others, we represent corporate purchasers guiding them through what may be one of their largest transactions ever. Whether it is entering into the pension risk transfer markets or developing new and innovative products with existing players, there is no global firm that is better placed than to assist. 14

15 Pension Risk Transfer Our pension de-risking/risk transfer services include: Advising schemes/plans and sponsors on global de-risking projects across multiple jurisdictions Drafting and negotiating contract terms, bulk group annuity contracts and definitive purchase agreements Drafting and review of benefit specifications and forms of bulk group annuity contracts, whether covering retirees in pay status or vested deferreds Due diligence for insurers, for all risks deals, where the insurer takes on the risk that the benefits are not as described in the benefit specification Reinsurance negotiating reinsurance arrangements including where back-toback with front-end bulk group annuity or longevity transactions Longevity swaps (including where structured as derivatives) and other hedging arrangements Captive or passthrough structures where pension schemes seek to access the reinsurance market directly 15

16 Pension Risk Transfer Recent transactional work by the firm and members of the team at predecessor firms Represented Legal & General/Banner Life as group annuity contract provider in a large pension de-risking transaction with Philips Electronics in the US Acting on a collateralized buy-in covering liabilities circa 1bn Acting on a EUR 200m transfer of Dutch pension liabilities Acting for an irish pension scheme on a circa EUR 400m pensioner buy-in using a captive insurer Represented Legal & General on the 1.1Bn pension buy-out with the Vickers pension scheme in the UK Acting for a large insurer on a 1bn longevity reinsurance contract Represented Kimberly-Clark Corporation with respect to a $2.5 billion group annuity contract Represented Motorola Solutions, Inc. with respect to a $4.2 billion transaction Represented Bristol-Myers Squibb with respect to a $1.4 billion group deal Represented Verizon with respect to a $7.5 billion group annuity contract Advised a large insurer as a new entrant into the pension buyout annuity marketplace 16

17 Pension Risk Transfer Key Contacts Bert Adams, Partner T: sutherland.com Brian Barrett, Partner T: s-sutherland.com Richard Batchelor, Partner T: sheds-sutherland.com Matthijs Bolkenstein, Partner T: versheds.nl Peter Fahy, Partner T: peterfahy@evershedssutherland.ie Hugh Gittins, Partner T: hughgittins@evershed s-sutherland.com Hugo Laing, Partner T: hugolaing@evershedssutherland.com Cynthia Shoss, Partner T: cynthiashoss@evershe ds-sutherland.com 17

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