Almost one-third of corporate financial executives say they might transfer their defined benefit pension liabilities to a third-party insurer over the next few years, a survey sponsored by Prudential Financial Inc. shows.
The survey also found a growing number of financial executives looking to maintain their DB plans, with 43% of respondents saying they were not likely to freeze or terminate their plans, up from 31% the year before.
Some 16% said they had already terminated their plans, down one percentage point from the previous survey of 140 financial executives. And 20% said they were somewhat or very likely to terminate or freeze, down from 47% the year before.
More than 170 senior financial executives responded to the survey, which was conducted in September 2010 by CFO Research Services on behalf of Prudential, Newark, N.J.
In a telephone interview, David Owens, associate director of research at CFO Research, Boston, and the author of a report on the survey's results, said the latest numbers point to a falloff in the number of companies “considering dramatic changes in their DB plans” from the previous survey, which was conducted in the midst of a recession.
Asked about closing their DB plans to new entrants, meanwhile, 35% said they had already done so, up sharply from 17% for the prior survey; 15% said they were somewhat or very likely to do so, down sharply from 52% the year before; and 29% said they were not likely to do so, edging up from 27%. Respondents saying “don't know/not applicable” jumped to 20% from 4%.
The big jump in the “don't know” tally could reflect the degree of uncertainty in what remains a dynamic environment, while the drop in the percentage likely to close the plans to new entrants simply could mean that those serious about doing so in 2009 “went ahead and did it,” said Mr. Owen.
Reducing the risks pension plans pose for sponsoring companies remained a major concern for executives.
Some 30% of respondents said they are likely to transfer risk to a third-party insurer in the next two years; 24% said they need more information before they can make a decision.
In a telephone interview, Charles Lowrey, executive vice president and chief operating officer of Prudential's U.S. businesses, said the two-year time frame might be “aspirational,” since few companies now enjoy the 110% to 120% funding levels needed to transfer their pension liabilities to an insurance company.
Still, after significant improvements in 2010, many companies have seen their pension funding levels recover to more than 90%, to the point where “they now, perhaps, see the light at the end of the tunnel,” said Mr. Lowrey. “We're encouraged by the conversations that we're having now.”
Pension buyouts are a fledgling market in the U.S. compared with the U.K., where there have been a number of deals.
On Dec. 1, Prudential Financial's Prudential Retirement unit announced its first pension buyout, taking on the assets and the liabilities of the $6 million defined benefit plan of Baltimore-based non-profit United Way of Central Maryland. “We were way too small to be able to absorb all the market fluctuations” affecting the organization's defined benefit plan, noted Patricia Kelt, UWCM's CFO. The plan was terminated in June, she said.
Mr. Lowrey expressed confidence that buyouts are poised to become more commonplace.
The growth in demand for insurers to take on corporate pension assets and liabilities will depend on the continued rebound in funding levels, but once those stars align, demand should be considerable, Mr. Lowrey predicted. “If markets cooperated, and funding levels got to the point where this is possible, you would see this happen,” he said.
And that demand, rather than being linear, could well come in “stair-step fashion,” Mr. Lowrey said, as market gains would likely make transferring pension risk to third-party insurers a viable option for a number of companies at approximately the same time.
The survey, meanwhile, provided evidence that big firms are as eager to get pension risks off their balance sheets, if not more so, compared with smaller firms. In a separate interview, Dylan J. Tyson, vice president and head of the pension risk transfer business team with Hartford, Conn.-based Prudential Retirement, noted the latest survey showed finance executives at 41% of companies with $5 billion or more in DB assets said they're likely to transfer their pension risks to a third-party insurer over the next two years.
Asked how much buyout business Prudential would look to do, Mr. Lowrey said as with any other “acquisition,” executives would make that decision by evaluating expected returns and the group's overall business mix, among other considerations.
With capital capacity an issue, in light of the reserves needed to manage pension buyouts, there could be a “first mover advantage for the people who do it,” he said.