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Derisking trend

Mixed opinions on GM’s plan to transfer $29 billion to Prudential



General Motors Co. plans to transfer $29 billion in assets from its pension plan to Prudential Financial Inc.'s insurance unit to fund the automaker's annuitization proposal — the largest such transaction among corporate pension sponsors.

The $29 billion will cover $26 billion in pension obligations of retirees in GM's U.S. salaried pension plan, providing a 10% overfunding cushion.

“That extra is really the premium for Prudential,” said Dave Roman, Detroit-based GM director, financial communications. “The funding at 110% of the obligations is effectively the price of the annuity contract.”

The pricing of the annuity, requiring GM to overfund the annuitized liabilities by 11.5%, implies a 3% annual long-term return on assets, said Maggie Ralbovsky, managing director at Wilshire Associates Inc., Santa Monica, Calif.

“GM is giving up the opportunity to earn a better return,” she said.

At that annuity price and for other reasons, Ms. Ralbovsky she doesn't see the annuitization trend catching on among major companies.

“If you believe you have a better chance of investing the (assets) than the insurance company, there is no reason to do” annuitization, Ms. Ralbovsky said, speaking generally.

Companies annuitizing “have to have their remaining (pension) assets work harder,” in terms of investing, Ms. Ralbovsky said. “For most companies, they need all their assets to earn a better return to catch up” in their funding levels. They need the scale, Ms. Ralbovsky added.

GM has the largest corporate U.S. defined benefit plan with $94 billion in assets, some 84% bigger than the next largest, International Business Machines Corp.'s $51.2 billion.

“For most companies, they should think about (doing their own) asset allocation, rather than cut a limb off with a terrible price,” Ms. Ralbovsky said, referring to annuitizing a set of assets and obligations at a high contractual price.

“You probably do better in the market (investing) that 3%,” Ms. Ralbovsky said. “If you cannot earn 3% (annualized) over a 20-year horizon, it is a failure of the markets.”

GM's U.S. defined benefit plan returned 11.1% on investments last year, the company reported Feb. 16.

“It is a very expensive deal,” Ms. Ralbovsky said of the GM annuitization. “It is a very low discount rate.”

“It's a risk-return trade-off for GM,” Ms. Ralbovsky said. The risk is GM's pension obligations are much bigger than its total market capitalization, she said.

GM has $134.2 billion in worldwide pension obligations, underfunded by $25.4 billion, while the company's recent market capitalization is $30.7 billion.

The GM U.S. salaried plan has $33 billion in assets and $36 billion in liabilities. Under the Prudential deal, GM agreed to contribute $3.5 billion to $4.5 billion in cash to its salaried plan to help fund the purchase of the group annuity contract and to improve the funded status of the remaining salaried plan for active participants, a GM statement said. GM will determine the final amount at the closing of the transaction.

With GM estimating a $4 billion contribution, that remaining salaried plan will have $8 billion in assets and $10 billion in liabilities, all still the responsibility of GM and overseen by the company.

The Prudential deal “is a cost they (GM) are willing to sustain because of the trade-off of risk,” Ms. Ralbovsky said.

“For GM … the risk management reason overshadows the price.” Ms. Ralbovsky said.

“These actions represent a major step toward our objective of derisking our pension plans and will further strengthen our balance sheet and give us more financial flexibility going forward,” Dan Ammann, GM senior vice president and CFO, said in the statement.

Mr. Roman said GM officials declined to discuss the impact on the pension plan's money managers of the transfer of the assets to Prudential Insurance Co. of America, the Prudential Financial unit that is providing the annuity. GM uses an asset/liability matching strategy for the salaried plan, according to a GM presentation.

“The money managers will lose that business,” Ms. Ralbovsky said, depending on GM's use of external managers.

"Prudential investment management teams managing the assets … will apply a sophisticated asset-liability management regime reflecting decades of experience with group annuities and other long-term contracts," according to a statement provided by Theresa Miller, Prudential vice president, global communications, who said Prudential executives wouldn't comment further.

State Street Bank & Trust Co., Boston, which GM had hired as independent fiduciary for the U.S. salaried plan, made the decision to select Prudential as the group annuity provider after a search of insurance carriers in the business, Mr. Roman said.

General Motors announced on June 1 it would offer lump sum payments to 42,000 U.S. salaried retirees. Any employees who decline the lump sums would be included in a group annuity contract GM will buy from Prudential Insurance for another 76,000 U.S. salaried retirees.

The annuitization deal is subject to a review by the Pensions Benefit Guaranty Corp., Washington, because it is a pension plan termination, as well as pending closing contractual conditions.

Marc Hopkins, PBGC press secretary, communications and public affairs department, in an e-mail said of the annuitization, “It's GM's responsibility to properly fund the plan so the level of assets meets the plan's benefit obligations.”

“Once the standard termination is completed the responsibility rests with Prudential,” Mr. Hopkins said in the e-mail. GM won't have any further obligation to that set of pension liabilities and the PBGC will no longer insure them, Mr. Hopkins added in the e-mail.

For the PBGC, annuitization is a balancing act of collecting lower premiums, while achieving lower risk exposure, said Ari N. Jacobs, Norwalk-Conn.-based senior partner, Aon Hewitt,.

“I think there is no question we have see the (pension plan) derisking trend for several years” now and see that trend including “the settlement of liabilities, the divesture of liabilities, the defeasance of liabilities,” Mr. Jacobs said.

“I think the trend is here,” Mr. Jacobs said.

Insurance companies have the capacity for annuitization deals now, Mr. Jacobs said

“The question is will they have the capacity if this trend takes off,” Mr. Jacobs said. “The capacity clearly exists today.”