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Special Report: Pension risk transfer

Buyouts continue roaring along, but sponsors change up tactics

Ari Jacobs sees something different this year — full plan terminations instead of retiree liftouts.

The pension buyout trend shows no signs of slowing down, although how many more jumbo deals are in the offing is unclear.

The most recent LIMRA Secure Retirement Institute survey said U.S. corporate pension plan buyout sales totaled $1.38 billion during the first quarter, the 12th consecutive quarter of sales exceeding $1 billion.

It is notable, too, that the data mark the third consecutive year in which first-quarter buyout sales exceeded $1 billion. Traditionally, pension risk transfer transactions take place in the third and fourth quarters.

That most recent survey did not include the jumbo transaction announced in May when FedEx Corp., Memphis, Tenn., disclosed its group annuity purchase from MetLife Inc. to transfer $6 billion in pension liabilities.

It was the largest such transaction since General Motors Corp., Detroit, and Verizon Communications Inc., New York, transferred pension liabilities of $29 million and $7.5 billion, respectively, in 2012. Even with the FedEx transaction, experts see this year's volume similar to last year's.

According to LIMRA, the total volume of buyouts stood at $23 billion in 2017.

Ari Jacobs, Chicago-based senior partner and global retirement solutions leader at Aon Hewitt, said: "I suspect the market this year will be similar to last year's, about $25 billion."

He said, however, he is seeing one change this year in the kinds of transactions some plans are undertaking.

"I would say probably one of the notable changes we're seeing and hearing is a lot more discussions about full plan termination than just retiree liftouts," Mr. Jacobs said. "Because of tax reform (or) whether it is relatively positive market movements in the last year, some are thinking it's about time to settle the whole plan than just a portion of the retirees."

Avery Dennison Corp., Glendale, Calif., is a recent example, announcing on July 10 it planned to terminate its U.S. pension plan, which had about $740 million in assets as of Dec. 31. The company intends to settle the plan by offering lump sums in 2018 and purchasing a group annuity contract from an insurance company in the first half of 2019.

Another trend since 2017 has been transferring liabilities of participants whose monthly benefits are relatively small, less than $500 a month, for example. Many plans have prioritized the reduction of headcount because of rising fixed-rate premiums to the Pension Benefit Guaranty Corp.

The fixed rate, which is measured per participant, was $35 in 2012, but is now $74 per participant and will increase to $80 in 2019.

David Eichhorn, president and head of investment strategies of NISA Investment Advisors LLC, St. Louis, said the small monthly benefit transaction has been more of what he's seen in the past year.

Mr. Eichhorn said it's more cost-effective for a company to reduce the number of retirees who had shorter tenures relative to the premiums paid to the PBGC.

Jumbo deals remain relatively rare in the U.S. Next to the FedEx deal, the largest pension buyout in the past six years was Schaumburg, Ill.-based Motorola Solutions Inc., transferring $3.1 billion in liabilities to Prudential Insurance Co. of America in 2014. P&I has recorded 12 buyouts of $1 billion or more since the beginning of 2012, according to the P&I Pension Risk Transfer database.

The most recent deals announced just missed $1 billion. Raytheon Co., Waltham, Mass., purchased a group annuity contract to transfer $923 million in U.S. pension plan liabilities to Prudential on July 17, about 3.5% of its total U.S. pension liabilities. According to the company's 10-K filing, those liabilities totaled $26.15 billion as of Dec. 31.

And ConocoPhillips Co., Houston, also purchased a group annuity contract from Prudential, announcing the second-quarter transaction on July 31 to transfer about $700 million in liabilities. The company had $2.54 billion in U.S. plan assets as of Dec. 31, according to its most recent 10-K filing.