Moody's: Ford, Boeing among those ripe for picking annuitization

Updated Aug. 7

Ford Motor Co., Boeing Co., Lockheed Martin Corp., Northrop Grumman Corp., and Exelis Inc. are among major companies that could be candidates for pension terminations modeled after General Motors Co.'s planned annuitization of its $33 billion U.S. salaried employees pension plan, according to a Moody's Investors Service report issued Monday.

The companies “fit the profile” for an annuitization “and have large benefit obligations relative to their market capitalization,” said the report, “Pension Terminations: No Free Lunch.”

GM, Detroit, plans to purchase a group annuity contract through Prudential for its 118,000 retirees in its $33 billion U.S. salaried defined benefit plan, reducing its pension obligations by $26 billion. GM has a total of $94 billion in U.S. pension assets and $107 billion in liabilities.

“Assuming pension risk is a natural fit for life insurance companies and capacity is ample,” the report said. “If a U.S. market emerges for pension terminations, Prudential Financial and MetLife are well positioned to handle large transactions.”

As of fiscal year 2011, Dearborn, Mich.-based Ford had $73.9 billion in projected benefit obligations, amounting to 136% of its market capitalization; Lockheed Martin, Bethesda, Md., $40.6 billion, 125%; Northrop Grumman, Falls Church, Va., $24.1 billion, 128%; Boeing, Chicago, $67.6 billion, 108%; and Exelis, McLean, Va., $5.7 billion, 244%, the report said.

“We believe companies like GM managing large benefit obligations, which distract from the core business and weigh on the market perception, will be most likely to pursue a similar transaction,”according to the report.

Companies have to fully fund their plans before they can seek annuitization, the Moody's report pointed out, noting that companies might need to close pension plans to new entrants, freeze plans, adopt liability-driven investing, and make large voluntary pension contributions or some combination of those steps to reach that position.

Pension terminations modeled after GM's annuitization in most cases be neutral in terms of the companies' credit rating, the report said. “These transactions would reduce underfunded pension liabilities and remove volatility associated with pension assets and liabilities, but most likely at a substantial liquidity cost or increase in leverage.

“The upfront liquidity costs or increase in leverage associated with a pension termination will be the key determinants of its credit impact. Such costs include bringing the plan up to fully funded status and the premium paid to an insurer to assume the plan risk.”

Charles Bickers, Boeing spokesman, said, “There are no plans for us to go the same route (as GM) at this time.” Boeing already has taken a number of steps to mitigate pension costs, Mr. Bickers said, noting the company's “non-union plan was changed to defined contribution from defined benefit (in) 2009. We've actually had similar changes for a number of our unions (plans moving) from DB to DC. And looking at our asset investment strategy,” Boeing moved “to liability-driven investing beginning in 2007. That has given us a slightly higher asset balance vs. the previous (investment) strategy over the downturn we've experienced in the last few years.” Boeing plans to stick with its LDI strategy, Mr. Bickers added.

Robert L. Shanks, Ford CFO, said in a webcast July 25, “In terms of annuitization, it is something that we have looked at as we were developing all of the strategies around our pension derisking; it isn't something that we thought at the time that we wanted to pursue.” It is “not something that is part of our plan, but I wouldn't necessarily take it off the table.”

Spokeswomen Jennifer Allen of Lockheed Martin and Margaret Mitchell-Jones of Northrop Grumman could not be reached for comment, nor could Exelis media representatives.