Finance Chiefs Express High Satisfaction with Pension Risk Transfers

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Reynold Terry
6 years ago
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Finance Chiefs Express High Satisfaction with Pension Risk Transfers Finance executives who have transferred pension risk

future. It was, it seems, an idea whose time had come. Five years ago, General Motors Co. and Verizon Communications Inc.

strategy for shedding pension risk: purchasing a group annuity to cover some of their defined benefit (DB) plan s pension

1 Finance Chiefs Express High Satisfaction with Pension Risk Transfers Finance executives who have transferred pension risk using group annuities report outcomes in line with expectations and suggest they ll be doing more such agreements in the future. It was, it seems, an idea whose time had come. Five years ago, General Motors Co. and Verizon Communications Inc. surprised much of the pension community when they undertook on a grand scale what until then had been a relatively obscure strategy for shedding pension risk: purchasing a group annuity to cover some of their defined benefit (DB) plan s pension liabilities. At a time when no other companies had done more than a $1 billion transaction in a single year, GM shed about $25 billion of its

2 Finance Chiefs Express High Satisfaction with Pension Risk Transfers pension liabilities 1 and Verizon about $7.5 billion. 2 Since those two megadeals, the strategy has surged in popularity.

2 2 Finance Chiefs Express High Satisfaction with Pension Risk Transfers pension liabilities 1 and Verizon about $7.5 billion. 2 Since those two megadeals, the strategy has surged in popularity. Now, a new survey from CFO Research helps to explain why: Finance chiefs who have used it report broad satisfaction with the outcomes, with nearly three out of four saying they are very likely to do additional transactions in the years ahead. The survey, conducted in May 2017 in cooperation with Prudential Financial, polled 80 senior finance executives in the U.S., including about half whose companies had bought a group annuity to shed some of their pension liabilities. In a typical transaction of this type, the plan sponsor transfers to the insurer securities and cash equal in value to the benefit obligation the sponsor wishes to shed usually a portion of its total obligation. Once executed, this arrangement transfers the liability from the plan sponsor s balance sheet to the insurer s balance sheet, and the insurer then becomes solely responsible for paying all future pension benefits to plan participants covered by the agreement. Eighty-three percent of the survey respondents who ve executed such a transaction said they are completely satisfied with all aspects of their group annuity purchase, and virtually the same number 81 percent agreed that plan beneficiaries affected by the transaction are content to receive their pension payments from an insurance company. Eighty-six percent said they believe the arrangement offers those participants greater retirement security in the long run. Among the survey respondents who had not purchased a group annuity to transfer pension liabilities, 49 percent said they have discussed such transactions with an external organization, and 21 percent said they expect to execute such an agreement in the next two years. 1 article/ /story/ ? template=printart 2 ONLINE/ /verizon-transfers-75- billion-to-prudential-in-partial-pension-buyout

3 3 Finance Chiefs Express High Satisfaction with Pension Risk Transfers FIGURE 1. What are the most important factors in your organization s decision to pursue a group annuity purchase? A desire to Manage the total costs of the organization s pension plan Mitigate the impact of rising PBGC premiums, including potential future changes Mitigate the impact of changing actuarial mortality assumptions, including potential future changes Reduce the pension plan s asset-related volatility Focus the organization on its core business (rather than on pension issues) Reduce the number of smaller-benefit payments being made 31% 25% 25% Multiple responses allowed. Survey respondents said their decision to purchase a group annuity was driven by a broad list of factors, but a desire to manage total pension costs including mitigating the impact of increased premiums paid to the Pension Benefit Guaranty Corporation was high on their list. (See Figure 1.) We were looking very closely at mitigating PBGC premiums, which are already big and becoming bigger over time, says Bruce Swain, executive vice president and chief financial officer for Crawford & Co., a provider of claims management solutions for insurance companies and self-insured entities. Crawford & Co. recently transferred about $20 million, or 5 percent, of its pension liabilities to an insurance company through the purchase of a group annuity. Since a portion of PBGC premiums are based on a flat per-participant rate, Crawford & Co. sought to maximize the benefit of the transaction by focusing on those retirees who were receiving relatively small pension benefits. That allowed it to shed the maximum number of participants for the amount of money it was willing to spend on the agreement. In addition to reducing PBGC premiums, Swain says, the transaction also will help minimize future volatility in the company s pension benefit obligation attributable to changes in mortality tables. Potential savings aside, many users of the group annuity strategy say its greatest appeal lies in its potential to help plan sponsors exit the pension business. John Reynolds, vice president of global accounting for Owens-Illinois Inc., a large glass container manufacturer, says his company s primary objective

4 4 Finance Chiefs Express High Satisfaction with Pension Risk Transfers when it transferred about $200 million in pension liabilities to an insurer in late 2016 about 10 percent of its total U.S. pension liabilities was to further Owens-Illinois overall risk mitigation strategy related to its defined benefit pension plans. After years of working through a variety of other de-risking strategies closing and freezing plans, as well as executing lump-sum buyouts of some plan participants a risk-transfer agreement involving the purchase of a group annuity was the next logical step. The benefit of an annuity purchase, he says, is the liability is relieved from your balance sheet. A senior manager of Verizon s pension agrees. There are a lot of riskmitigation strategies in the marketplace that look at matching your pension assets with your pension liability, but at the end of the day you re still the fiduciary for that liability and you re still responsible for the ongoing maintenance of that pension structure, says Brady Connor, president and chief investment officer of Verizon Investment Management Company, a subsidiary of Verizon Communications that manages the company s retirement plan assets. Buying a group annuity that transfers the liability to an insurer is the only way you can truly void your company of that obligation. It has been five years since Verizon did its big transaction, in which it transferred about a quarter of the company s defined benefit pension obligation to an insurer. The agreement has worked out, Connor says, surprisingly close to what we expected. From an execution standpoint, it s been flawless, Connor explains. We have no buyer s remorse. There were really no surprises in terms of the economics of the deal whatsoever. And the participants, which is what we primarily care about, have been fully served under this new third-party model. There are no legal issues outstanding, and we ve had a 100 percent execution rate from the insurance company in terms of meeting benefit obligations. Crawford & Co. s Swain reports a similar experience. The benefits we got are generally what we expected going in, he says. We have been pleased thus far with our decision, and are planning to undertake another annuity process in 2018 of a comparable amount.

5 5 Finance Chiefs Express High Satisfaction with Pension Risk Transfers ABOUT THE SURVEY This year marks the seventh annual survey that CFO Research has conducted in cooperation with Prudential Financial, Inc. These surveys provide insights into senior finance executives current thinking about their companies retirement and benefits programs. As part of this year s survey, 80 senior finance executives were asked questions that were specifically focused on pension risk transfer. Among executives whose companies have already purchased a group annuity for their pension plan, we aimed to shed light on the reasons they did so, and to gauge their level of satisfaction after having concluded a pension risk transfer. Among executives whose companies have not yet executed a pension risk transfer, we aimed to gauge their knowledge of these instruments and the various economic and taxrelated issues that might influence attitudes and plans for future agreements. The Prudential Insurance Company of America Newark, NJ

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