The main reasons for the popularity of pension risk transfers in 2019 remain unchanged from previous years, with a focus on the four financial management objectives listed below.
- “Derive” the company’s balance sheet by transferring pension obligations to third parties (generally life insurance companies) that assume responsibility for the payment and administration of future pension payments to plan participants and their beneficiaries.
- Provide greater financial security to plan participants.
- Eliminate rapidly rising costs assessed by Pension Benefit Guarantee Corp. (PBGC). In 2007, the PBGC charged $ 31 and $ 8 per participant for single-employer plans and multi-employer plans, respectively. For 2019, PBGC’s comparable premiums stood at $ 80 and $ 29, respectively.
- Recognize that plan participants live longer, as documented in the 2019 updates to actuarial mortality tables published by the Society of Actuaries.
Main pension risk transfer actions of 2019
The following companies took the lead in the size of their 2019 pension risk transfer efforts.
Bristol-Myers Squibb announced plans in December 2018 to completely terminate the Bristol-Myers Squibb Retirement Income Plan through a combination of lump sum payments and the purchase of a group annuity contract from Athene Holding Ltd. As reported In the company’s 10-Q for the quarter ended September 30, 2019, the company paid $ 1.3 billion to pension plan participants who chose to receive a one-time payment and purchased a $ 2.4 billion contract from Athene to transfer the remaining pension. obligations.
Baxter International Inc. entered into an agreement on October 4, 2019 with Prudential Insurance Company of America and State Street Global Advisors Trust Company to purchase a non-participating single premium group annuity contract. The transaction is projected to reduce the Pension Plan liability of Baxter International Inc. and Subsidiaries by $ 2.4 billion and affect 17,200 plan participants, as reported to the SEC in an 8-K dated October 4, 2019.
Lockheed Martin Corporation purchased a $ 1.8 billion group annuity contract from The Prudential Insurance Company of America in January 2019, which affected approximately 32,000 retirees.
Weyerhaeuser Company announced plans in August 2018 to reduce pension liabilities by $ 1.5 billion, while still meeting all pension obligations, through the combined use of lump sum payments and a risk transfer action. On January 23, 2019, Weyerhaeuser Company purchased a group annuity contract from Athene Annuity and Life Company and State Street Global Advisors Trust Company. The transaction affected approximately 28,500 Weyerhaeuser retirees and beneficiaries, the SEC was informed in an 8-K filed on January 23, 2019.
In a 2018 article titled “Pension Risk Transfers Strong in 2018,” we review similar pension risk transfers made last year by International Paper Co., FedEx Corp., AK Steel Holding Corp. and TJX Companies, Inc.
Pension plan sponsors continue to close pensions to new employees
In an effort to further reduce future pension obligations, large plan sponsors are also closing existing defined benefit plans for new hires and / or reducing benefits.
General Electric announced in November 2019 that it plans to freeze pension benefits for up to 20,000 US employees with salaried benefits, beginning in January 2021. The measure is expected to save between $ 4 and $ 6 billion. GE’s pension plan has been closed to new entrants since 2012.
FedEx Corp. announced in November 2019 that it will close its defined benefit pension plan to new hires in 2020. Instead, the shipping giant plans to offer enhanced 401 (k) benefits to qualified workers, including a contribution from the employer up to 8%, starting in 2021.
FedEx’s move follows similar action by shipping rival United Parcel Service, Inc., which closed its pension plan to new hires three years ago in 2016, according to Wall Street Journal reports.
FedEx transferred responsibility for $ 6 billion in pension obligations to MetLife in a 2018 action that affected up to 41,000 plan participants and beneficiaries.
Actions by the pension plan sponsor to close defined benefit plans to new entrants are also known as plan “hibernation” or “freeze” risks, according to a recent Mass Mutual report titled “Key Decisions to Reduce Risk of your pension plan “. However, risks remain even in closed plans in the form of interest rate risk and market volatility.
Tea Wall street journal reported in a November 18, 2019 article that “most of the 100 largest corporate pension plan sponsors have implemented some form of freeze” on pension benefits for new hires.
ERISA and pension expert Mark Johnson welcome questions from litigants and pension administrators on pension risk transfer issues.
