Verizon Communications Inc., New York, will close its defined benefit plans for union employees to new hires and place them exclusively in the company's 401(k) plan, as part of tentative contracts with the Communication Workers of America and International Brotherhood of Electrical Workers unions, confirmed Raymond McConville, Verizon spokesman.
Verizon and the unions reached a tentative agreement on Sept. 19, and the contracts are in the ratification process, according to Verizon's earnings statement issued Thursday. Current union employees are in both a defined benefit and 401(k) plan.
The news comes a day after the company announced it will purchase a group annuity contract with Prudential Insurance Co. of America to transfer $7.5 billion in pension obligations for about 41,000 retired salaried employees who began receiving pension payments before Jan. 1, 2010. Retirees formerly represented by unions are not affected by the buyout.
Mr. McConville said Verizon executives were not being made available for interviews.
The partial pension buyout “is part of an overall pension derisking strategy and reduces our exposure to funding and income statement volatility caused by change in investment returns, discount rates and longevity risk,” said Francis J. Shammo, Verizon executive vice president and CFO, in an earnings conference call Thursday. “It also allows us to transfer this liability at reasonable economics and avoid certain administrative costs while improving the longer-term financial profile of the business.”
About four months ago, 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 a group annuity contract, also with Prudential. Verizon already offers many of its salaried participants lump-sum options at the time of their retirement, Mr. McConville said.
“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. Fiduciary Counselors, Verizon's independent fiduciary, hired Oliver Wyman to advise on the transaction.
“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,” Mr. Tadros said.
The trend of pension derisking “is very real and will continue,” said Ari Jacobs, senior partner and global retirement solutions leader at Aon Hewitt, which served as lead adviser for Verizon along with Morgan Stanley.
The move toward pension buyouts and lump-sum offers has been going on for about a decade, Mr. Jacobs said. Companies started freezing and closing pension plans in the early 2000s and then went to derisking strategies following the 2008-2009 financial crisis. That has all led to the point where companies are looking to clear pension liabilities off their balance sheets, he said.
No single pension annuitization transaction has exceeded $1 billion since the late 1980s until GM, Mr. Jacobs said.
“There's a very clear evolution of organizations taking on less pension risk that had been highly rewarded (before),” Mr. Jacobs said in a telephone interview. “It's a logical next extension.”
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 in a telephone interview. 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.
As transactions like these take place, there will also be a shift in the way the assets are managed, Aon Hewitt's Mr. Jacobs said. Whereas a typical pension plan has more than 50% invested in equities, insurance companies will mostly invest the assets in high-quality corporate bonds to match liabilities. Prudential and MetLife are the two largest players in the buyout market, but Mr. Jacobs said other insurance companies have the capacity to handle these large deals and are building up teams to compete.
Verizon intends to make about $2.5 billion in pension contributions in connection with the Prudential transaction, including a $930 million contribution in September. Verizon estimates it will contribute $3.4 billion to the plan in 2012 compared to the $1.3 billion estimated at the beginning of the year. Messrs. Tadros and McConville 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 plans had about $24.1 billion in assets and $30.6 billion in liabilities for a funded status of 78.8% as of Dec. 31.