The decisions of Motorola Solutions Inc. and Bristol-Myers Squibb Co., the most recent big companies settling pension obligations by purchasing group annuity contracts, reinforce a trend by corporate sponsors to get such liabilities — especially those of employees now retired or inactive — off their balance sheets and onto where they belong: with insurance companies and other entities prepared to manage these risks.
Corporate pension sponsors, by and large, don't want to be pension fund fiduciaries. They don't want to deal with the financial market volatility that makes it impossible to know what next year's contribution to the fund will be. In addition, they do not want all the administrative responsibilities, or the legal and regulatory risks, such an obligation demands.
By offloading the obligations to insurance companies, they no longer have to deal with market forces beyond their control that have increased liabilities in a low interest-rate environment. The move also allows the companies to focus more attention on their remaining pension assets and obligations.
Companies should not be in the pension business. They generally don't have the investment expertise, and only the largest have the resources to oversee the accumulated pension assets and obligations.
As Robert O'Keef, Motorola Solutions' corporate vice president and treasurer, said in a Sept. 29 Pensions & Investments story, the company wanted to focus more on its core expertise and mission. “It's not managing (pension) assets and liabilities,” Mr. O'Keef said. “Prudential's core business is. That's where this activity belongs. Prudential is equipped to manage these risks. We're not.”
Having to deal with the pension oversight cost and increasing complexity from regulation to markets all contributed to the demise of defined benefit plans. As corporate sponsors freeze or close their programs, they will consider annuitization as well as lump sum payouts.
Congress ought to reform the pension system to encourage creation of multiple employer pension plans, which could strengthen defined benefit programs, yet take fiduciaries duties away from single corporate sponsors that participate.
Pension buyouts end the requirement plan sponsors pay premiums to the Pension Benefit Guaranty Corp. because the liabilities no longer are covered by the federal insurance program. With the buyout, Motorola avoids being potentially subjected to higher PBGC premiums, if Congressever enacts the PBGC proposal to base premiums on credit worthiness of corporate sponsors.
Annuitization should bring more attention to the market for group annuities. So far the biggest annuitizations have been with a single insurance carrier. Unless other carriers step up, there is risk that the concentration of the market could deter other pension buyouts. So far, this concentration doesn't appear to hurt competitiveness of pricing. Motorola achieved its buyout without paying a premium, unlike some earlier big annuitizations.
The large buyouts should also draw more attention to the increasing responsibility state insurance regulators and guaranty programs have in pension security as participants are no longer under PBGC protection. State insurance commissioners should examine how much risk these buyouts add to state programs' finances if they must backstop the annuitization promises. They also must examine state insurance regulatory oversight of insurance companies and how they manage the assets that are supposed to cover the benefits. n
