Vastly improved funding of corporate defined benefit plans should lead to more pension buyouts and lump-sum offers like the deal announced on Nov. 13 by SPX Corp., Charlotte, N.C.
SPX hired Massachusetts Mutual Life Insurance Co. to purchase annuities to cover about $625 million in pension obligations for about 16,000 retirees. It is believed to be the third-largest buyout in the U.S. since the financial crisis, trailing General Motors Co. and Verizon Communications Inc.
SPX also hopes to eliminate about $175 million of pension obligations from its balance sheet by offering a lump-sum option to 7,500 vested former employees.
Last year, GM unloaded about $28 billion through lump sums and annuities, while Verizon executed a $7.5 billion buyout.
The SPX pension plan has been frozen since 2001. SPX made a $250 million voluntary contribution in the first quarter of this year to put the U.S. pension plan in position to pursue an annuity buyout.
“That put us essentially in a fully funded position,” said Ryan Taylor, director of investor relations at SPX, a global multi-industry manufacturer serving the food and beverage, power and energy, and industrial markets. Since then, the $1.2 billion pension plan's funded status increased to about 110% on strong market returns, Mr. Taylor said.
Mr. Taylor said the fee SPX paid MassMutual “was lower than we expected.” He wouldn't elaborate.
Sean Brennan, principal in Mercer's financial strategy group based in New York, said insurers typically charge a premium between 6% and 12% of the amount of liabilities transferred.
Mr. Taylor said the “key takeaway” of the transaction was the deal didn't cost SPX anything additional; pension assets were used to pay MassMutual.
He also noted the plan still will be fully funded after the transactions are completed.
Many corporate defined benefit plans became fully funded or even overfunded this year. The discount rate used to calculate liabilities has increased 74 basis points year-to-date through Oct. 31, causing liability figures to decrease significantly. Plus, the S&P 500 stock index is on pace for its largest one-year gain since 1997, when it returned 33.1%. It reached a record high on Nov. 21 and is up 28.34% on the year through that date. The Russell 3000 is up 29.19% during the same time period.
Mercer estimates 26% of S&P 1500 corporate plans were fully funded as of Sept. 30, up from 4% at the end of 2012. If discount rates increases another 100 basis points, 46% of plans would be fully funded, Jonathan Barry, a Mercer partner based in Boston, said during a Nov. 20 Mercer webinar on pension risk transfers.
“It's really a place that was almost unthinkable a year ago,” Mr. Barry said. The aggregate funded status of S&P 1500 companies has increased to 91% through October from 74% at the end of 2012.
Mr. Brennan said it “seems imminent that more transactions will move forward.”
Alla Kleyner, New York-based assistant vice president and actuary at MetLife Inc., said during the Mercer webinar that 24% of companies for which MetLife quoted a deal this year completed an annuity buyout. That is up from 22% in 2012 and 17% in 2011. Further, if plans already scheduled to complete a deal do so by the end of the year, that 2013 rate could increase to as much as 30%.
“It's a significant pickup of transaction activity,” Ms. Kleyner said.