A new day is seen dawning in pension derisking as a result of General Motors Co.'s purchase of a multibillion-dollar group annuity contract to cover future benefit obligations of retirees in its U.S. salaried defined benefit plan.
And it's a day for which insurance companies have spent years planning, in hopes a company with a large pension plan would make this move.
Sources said pension executives at large plans have looked into pension buyouts in recent years, but were hesitant to become the first. Compounding the indecision is the fact that a low funded status coupled with low interest rates makes it a costly proposition.
“I think that this transaction defines a new era in pension derisking in the U.S.,” said Dylan Tyson, Woodbury, N.J.-based senior vice president and head of pension risk transfer at Prudential Financial Inc., which struck the deal with Detroit-based GM on June 1. “People will look back and say this is what ignited a trend in pension derisking.”
Detroit-based GM is purchasing a group annuity contract for its 118,000 retirees in its $33 billion U.S. salaried DB plan. The pension buyout will reduce the automaker's pension obligations by $26 billion. Some 42,000 of those retirees have an option to accept a lump-sum benefit by July 20 instead. GM has a total of $94 billion in U.S. DB assets and $107 billion in liabilities.
(Separately, GM will terminate its current salaried pension plan and replace it with a new defined benefit plan for active U.S. salaried employees and those who retired after Dec. 1 with the same provisions as the terminated plan.)
“This is by an order of magnitude, the single largest (pension buyout) transaction both in the U.S. market and globally,” said Ramy Tadros, New York-based partner and head of the Americas insurance practice at Oliver Wyman Group.
“What makes this a real landmark is the sheer size of it. They are the first ones to go through this and test the market reaction to a move like this.”
Oliver Wyman advised on the deal. State Street Corp., as independent fiduciary to GM's pension plan, hired Oliver Wyman and Mercer LLC to help with due diligence on potential insurers and the structure of the annuity contract.