Pension Annuitization Continues in De-Risking Trend

A consumer products company announced that effective June 1, retirement pension benefits owed to approximately 21,000 of its retirees will now come from two U.S. insurers. The company’s assistance obligation was about $7 billion, while plan assets stood around $6 billion in 2014.

Although the first insurance company will be the only annuity administrator for the assistance payments, each retiree’s assistance will be divided uniformly between the two as a security reinforcement measure. An independent fiduciary represented the retirees’ interests and determined a divided transaction was the safest obtainable annuity structure.

The annuity buy will be funded with assets of the product company’s U.S. pension plan. To sustain the move, the company expects to make a $400- to $475-million contribution funded by debt financing, incremental to the company’s past assumption for 2015 global defined assistance pension plan contributions of up to $100 million.

A Texas-based personal care corporation expects a non-cash pension settlement charge of $800 million in the second quarter of this year, but that will be excluded from the company’s 2015 modificated results. The company expects that this transaction will likely save the firm around $2.5 billion without changing the monthly assistance of retirees, or damaging the company’s financial outlook.

AON HEWITT SURVEY: PLAN SPONSORS REVIEW SETTLEMENT STRATEGIES

The leading consumer products company follows in the footsteps of other companies that have alternation their pension plan obligations in light of rising insurance premiums and longer retiree life spans. A recent Aon Hewitt survey of 183 defined assistance plan sponsors indicated that as many as two-thirds of respondents intend to take further action in 2015 to rein in Pension assistance Guaranty Corporation (PBGC) premium costs in the future, and most, are likely to elect settlement strategies to do so.

Based on the answers of defined assistance pension plan sponsors in the survey, it was revealed:

• Almost one-quarter (22 percent) of employers are very likely to offer terminated vested participants a lump sum window in 2015
• 19 percent plan to increase cash contributions to reduce PBGC premiums in the year ahead
• 21 percent are considering purchasing annuities for a portion of their plan participants

In addition, Aon Hewitt’s survey also found that plan sponsors are increasingly adjusting plan assets to better balance limitations:

• More than one-third (36 percent) have recently made this shift
• 31 percent of the remaining group are very likely to do so in the year ahead

Other results from the survey are telling in terms of where companies currently stand with their pension plans:

• 74 percent have a defined assistance plan
• 35 percent have an open, on-going pension plan
• 34 percent have a plan that is closed to new hires
• 31 percent have a frozen plan
• 45 percent recently conducted an asset liability study
• 25 percent are slightly or very likely to do a liability study in 2015 (of those that have not in addition done so)
• 18 percent performed a mortality study in 2014; 10 percent plan to do so in 2015
• 26 percent currently monitor the funded position of their plan on a daily basis, up from just 12 percent in 2013

MANAGING PENSION PLAN VOLATILITY

Employers who plan ahead to better manage possible volatility of their pension plans-either by the buy and move of annuities or by lump sum payment offerings-will be better positioned in the future. However, de-risking must not only balance the company’s bottom line but also protect retiree assets.

In 2013, the Department of Labor’s ERISA Advisory Council issued a report confirming recent increases in defined assistance plan de-risking activity. The Council addressed the need to view these transactions as more of a ‘move of risk’ because when the pension plan sponsor removes its risk, the transaction results in a corresponding increased risk for the other party-either the insurer in the event of an annuity buy or in the individual participant in a lump sum payment offering.

The Council recommended that the Department of Labor:

1.) Clarify the scope of IB 95-1 to include that de-risking activity applies to any buy of an annuity from an insurer as a dispensing of benefits under a defined assistance plan, not just purchases coincident with a plan termination. Also to consider the development of safe harbors within the scope of the Interpretive Bulletin for such purchases.

2.) Require that a defined assistance pension plan provide participants with an option of a lump sum dispensing within a stated window, with or without a separate option of the dispensing of an annuity described in IB 95-1.

3.) Consider providing guidance under ERISA Section 502(a)(9) to provide clarity to plan fiduciaries regarding the consequences of a breach of fiduciary duty in the selection of an annuity contract for dispensing out of the plan, including guidance for the term “appropriate relief” (e.g., whether monetary relief is obtainable) and under what circumstances “posting of security” generally may be necessary.

4.) Provide education and outreach to plan sponsors.

5.) Consider the possible benefits of collecting applicable information regarding plan de-risking in the form of lump sum windows and annuity purchases outside the context of a plan termination.

IN SUMMARY

As ERISA-Benefits Consulting has reported in the past, pension move deals are likely to continue as plan sponsors look for ways to move employee-assistance costs and associated limitations off their books.

in addition, the pension annuitization trend is a concern for some retirees because their benefits no longer carry pension guarantees from PBGC. If Prudential, Mass Mutual or another insurance company comes across financial challenges, shortfalls in payouts would be handled by state-mandated guaranty funds that are financed by the insurance industry.

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