When General Motors announced its intention to transfer $26 billion in pension liabilities by purchasing an annuity contract from Prudential, it immediately changed the parameters of traditional defined benefit pension plan management. As a result, pension risk transfer immediately became an acceptable means for pension plan sponsors to manage pension risks. The trend toward pension risk transfer is only likely to accelerate as long as there is capacity in the marketplace for these transactions. Last week, Verizon completed the purchase of a single premium group annuity contract from Prudential Insurance under which Prudential will assume approximately $7.5 billion of Verizon’s pension liabilities. Verizon also staved off a court challenge to the transaction as the deal went through after a federal district court refused an injunction to stop it. Beginning January 1, Prudential will begin to make annuity payments to 41,000 Verizon retirees covered by the annuity contract. The much larger and groundbreaking $26 billion pension risk transfer deal between General Motors and Prudential was completed in November.
According to a report issued by Aon Hewitt in October: “The size of pension settlement actions announced in 2012 has redefined the market. In the U.S., the amount of pension liabilities annuitized in recent years has not exceeded $1 billion per year, and no single transaction has exceeded $1 billion since the 1980s. The transactions by Verizon ($7.5 billion) and GM (expected to be a large portion of the $26 billion in liabilities it intends to settle) are an order of magnitude larger than this.” But pension plan sponsors are not limiting their efforts to one approach as they look for other ways to reduce pension risks and liabilities. Some examples include pension plan sponsors offering terminated employees who are fully vested in the plan a window during which they can take a lump sum payment of their vested benefits and other plan sponsors taking advantage of low interest rates to finance pension contributions in order to shore up funding levels. Some options plan sponsors are exploring to improve pension funding and plans risks are somewhat controversial. In October, AT&T applied for a prohibited transaction exemption with the U.S. Department of Labor (DOL) to increase its pension plan holdings in company stock to 18%, well above the 10% limit imposed by the Employee Retirement Income Security Act (ERISA). The transaction would move $9.5 billion in preferred stock in AT&T’s wireless business, AT&T Mobility. The DOL is expected to issue a ruling on this request next year or in 2014. As the low interest rate environment continues to put pressure on pension plan funding levels, moves like these are likely to continue. After all, underfunded pension plans are a drag on the balance sheet and can adversely affect credit ratings.
