Motorola wraps up pension buyout at light speed

Motorola Solutions Inc.'s pension buyout, the third largest in U.S. history, was the fastest by a mile, taking less than six months from start to finish.

The Schaumburg, Ill.-based company's buyout agreement with Prudential Insurance Co. of America will total about $3.1 billion and cover about 30,000 Motorola retirees in its frozen defined benefit plan, the company announced Sept. 25.

In size and scope, it is the third-largest U.S. buyout of its kind after General Motors Co., Detroit, and Verizon Communications Inc., New York, entered into similar buyout agreements with Prudential in 2012.

The company also announced a lump-sum offer to about 32,000 terminated vested participants who have yet to retire from the workforce, to whom Motorola Solutions is offering a lump-sum window beginning Oct. 1 and ending Nov. 7. The payments will be made on Dec. 19.

Overall, the two moves could potentially cut the company's U.S. pension obligations in half.

“I think it started coming together when we decided to divest our enterprise business this year,” Robert O'Keef, Motorola Solutions' corporate vice president and treasurer, said in a telephone interview.

In April, Motorola Solutions announced it had agreed to sell most of its enterprise business, which includes mobile computing, bar-code-scanning technology and local area networking, to Zebra Technologies Corp. The deal is supposed to close by the end of the year.

“This is a company that has gotten smaller over the last decade and a half,” Mr. O'Keef said, “so if you rewind 15 years, the company had $45 billion in sales, six major businesses, (and) 150,000 employees. What we're going to be left with after the divestiture ... is a monoline business with about $6 billion in revenue and about 15,000 employees. And this business is still saddled with a legacy pension.”

Mr. O'Keef said the announcement of the divesture in April was the final step needed before company executives could deal with pension issues. They immediately began working on the buyout, finishing in less than six months a process that typically takes 12 to 18 months.

“The cornerstone principal from a capital assurance standpoint was to maintain our current BBB (credit) rating,” Mr. O'Keef said. “We determined we were able to borrow a billion dollars to shore up the plan, annuitize the retiree portion and offer about $1 billion in lump sums.”

Mr. O'Keef, who joined Motorola Solutions in 2013 and had been director of capital planning at General Motors from 2004 to 2006, brought in former GM colleagues and hired a team of advisers to help accelerate the process.

“Motorola recognized that it had a very large pension plan with many legacy parts,” said Ari Jacobs, senior partner and global retirement solutions leader at Aon Hewitt, one of Motorola Solutions' advisers on the transaction. “About 90% of the participants were former employees, rather than current employees, and they realized (the size of the plan) wasn't right with where the company was going.”

“They worked incredibly diligently and incredibly quickly,” Mr. Jacobs said.

During the process, Mr. O'Keef and his team found an insurance market that was highly receptive to what the company was seeking. “The insurance community, I'd call it a full-baked cake,” Mr. O'Keef said. The deal “was totally executable and ready to go and we found a very, very receptive insurance market on the annuitization side.”

Mr. O'Keef said Prudential was the most cost-effective insurer.

“In effect, we're transferring that liability at par,” without paying Prudential a premium, Mr. O'Keef said. “It's groundbreaking because it's the third-largest annuitization ever done, and it's further groundbreaking in that it's being done at par.”

In addition to the $3.1 billion in U.S. pension obligations the company is transferring to Prudential, the lump-sum offer to terminated vested participants targets about $1.1 billion in U.S. pension obligations, bringing to $4.2 billion the total U.S. pension obligations Motorola Solutions executives hope to move off its balance sheet. The company also announced it would raise its 2014 contribution to the plan to $1.1 billion from the previously announced $300 million.

Mr. O'Keef said the liability for the plan currently stands at about $8.4 billion.

The company had $6.071 billion in U.S. defined benefit plan assets and $7.317 billion in projected benefit obligations as of Dec. 31, for a funding ratio of 83%, according to its most recent 10-K filing.

What also helped complete the process quickly was the relative liquidity of the pension plan's portfolio. The plan was closed in 2005 and frozen in 2009, Mr. O'Keef said.

As of Dec. 31, according to the 10-K filing, the plan had 55% equities, 42% fixed income and 3% in cash.

The liquidity was a “huge attraction for the insurer. The fact that our portfolio is perfectly liquid: 60% passive, no private equity, no alternatives, made this a slam dunk. I didn't have the GM problem, I didn't have the Verizon problem” of dealing with illiquid investments in making the transfer to Prudential, Mr. O'Keef said.

Managing the frozen plan following the buyout and lump sum payments will require a change in approach, Mr. O'Keef said.

“We hired Goldman Sachs Asset Management to oversee the pension,” Mr. O'Keef said.

“They've been instrumental in getting us through the derisking process (and) we're now completely overhauling strategic asset allocation for the remaining portfolio. The theory is, with this long-duration portfolio, we've got more time to address it (and) the deficit is a fraction of what it otherwise would have been.

“They are a quasi-OCIO so the plan is retaining significant discretion and Goldman Sachs is our lead adviser and our lead implementer and lead asset manager; however, the plan is retaining significant discretion,” Mr. O'Keef said.

In getting approval for the buyout and lump-sum payments, Mr. O'Keef said the company's board knew where the company's expertise lies.

“Something that really got this across the finish line internally ... is looking at our core mission ... It's not managing assets and liabilities. Prudential's core business is. That's where this activity belongs.”

“Prudential is equipped to manage these risks. We're not.”

Data editor Timothy Pollard contributed to this story.