More pension liability offloading by corporate plans expected

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.

It has been a similar story in the U.K., where three large buyout transactions were completed during the past several months.

EMI Group Pension Fund, London, purchased an annuity contract in July with Pension Insurance Corp. to cover £1.5 billion ($2.42 billion) in liabilities and 20,000 participants. It eclipsed the previous largest buyout in the U.K., for asbestos maker Turner & Newall, covering £1.1 billion in liabilities, according to multiple sources.

Last week, NCR Corp., Duluth, Ga., entered into a buyout contract with PIC to transfer $1 billion in pension liabilities related to its U.K. subsidiary, NCR Ltd. NCR already had offered lump sums to deferred vested participants in its U.S. pension plan in August 2012 and is working toward moving plan assets 100% into fixed income as it continues to derisk. NCR spokesman Andy Phillips declined to comment on whether the company will pursue a buyout for its U.S. pension plan.

In August, InterContinental Hotels Group PLC, Denham, England, completed a buyout of its U.K. pension fund with Rothesay Life and covered about £440 million in liabilities.

“The funding position of most DB schemes in the U.K. has improved in recent months as a result of investment performance, increasing long-term interest rates and contributions from the sponsor,” Jay Shah, co-head of origination at Pension Insurance Corp., based in London, said in a news release on the NRC buyout deal. “For many pension plans a buy-in or buyout has now become more affordable.” (A buy-in, while similar to a pension buyout, differs in that the company will still be the administrator of the plan and make the benefit payments, while the investment and longevity risks are with an insurer.)

James Gannon, director of asset allocation and risk management at Russell Investments in Seattle, said the intent to pursue buyouts is definitely there, but it has just been recently that plans have overcome the biggest hurdle — funded status.

A June survey from Mercer — taken when the funded status of the S&P 15000 was 86% — showed 15% of respondents were very likely to do a pension buyout in the next two years, and 33% said they either were somewhat likely or would consider such a move.

When asked about offering lump sums to vested former employees, 28% said they were very likely to do so and 39% were somewhat likely or would consider the move.

Mr. Gannon said corporate executives should consider offering lump sums next year when better rates are expected and before new mortality tables are integrated into actuarial valuations in 2015 or 2016. He noted, however, that insurance companies use their own custom mortality tables in annuity buyout pricing for each plan.

Mr. Brennan said he expects to see one or two insurers enter the market in the next 12 months.

Jason Richards, St. Louis-based senior consultant in the retirement risk management group at Towers Watson & Co., said insurers have been “very aggressive” in pricing and administrative capabilities as they try to get a slice of a growing business. Towers Watson served as primary adviser to SPX on the buyout deal.

“There definitely seems to be insurer appetite to get transactions done ... we've seen some attractive pricing,” Mr. Brennan said.