Verizon transfers $7.5 billion to Prudential in partial pension buyout
By Kevin Olsen | October 17, 2012 5:16 pm
Verizon Communications Inc., New York, will purchase a group annuity contract with Prudential Insurance Co. of America to transfer $7.5 billion in pension obligations, according to an 8-K filed Wednesday afternoon.
The partial pension buyout will cover about 41,000 retired salaried employees who began receiving pension payments before Jan. 1, 2010. Retirees formerly represented by unions are not affected.
The announcement comes a little more than four months after General Motors Co., Detroit, announced the largest pension risk transfer in history, reducing its pension obligations by $26 billion through a combination of lump-sum offers and group annuity contract with Prudential.
“If the GM deal hadn't happened, it (the Verizon buyout) would be the largest transaction by an order of magnitude,” said Ramy Tadros, partner and head of the Americas insurance practice at Oliver Wyman Group, which advised Verizon on the deal along with Mercer. “With GM, people thought it was a one-off deal, but with Verizon, two deals in a short period of time make it a trend, and a significant one at that. In sheer size, it is quite significant.”
In an interview, Mr. Tadros said Verizon's rationale for the transaction was reducing pension liabilities and future volatility in earnings and contributions so it can focus on its core business.
In terms of managing credit, interest and longevity risk against cash flow, that is the “bread and butter of what a life insurance company does,” Mr. Tadros said. Managing pensions is “not a core business” for these companies. He added that Oliver Wyman has been discussing the buyout option with other companies but declined to identify them.
“Clearly, there is tremendous activity in this space and people are rethinking their obligations to pension management,” Mr. Tadros said.
Verizon intends to make about $2.5 billion in pension contributions in connection with the transaction. Mr. Tadros declined to comment on the total amount to be transferred to Prudential. Verizon anticipates the transaction will close and the group annuity contract be issued in December.
Verizon's defined benefit plan had about $24.1 billion in assets and $30.6 billion in liabilities for a funded status of 78.8% as of Dec. 31.