Motorola Solutions Inc., Schaumburg, Ill., which completed the third largest annuity transaction in U.S. history in September, transferred its risk for similar reasons. The transaction reduced liabilities by about $3 billion. As of Dec. 31, after the annuity transactions in tandem with lump-sum offers, U.S. plan assets totaled $3.3 billion and projected benefit obligations totaled $4.5 billion, according to the company's recently released 10-K filing.
“This is a company that has gotten smaller over the last decade and a half, 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,” Robert O'Keef, Motorola Solutions' corporate vice president and treasurer, said in an interview at the time.
“You look at Kimberly-Clark (which announced a buyout Feb. 23) and Verizon a year or two ago, these are not companies that felt like they had to do something, I think they looked at the economics and they thought this made sense to do,” Mr. Boudreau said.
Additionally, with pension liabilities now making an impact on balance sheets, companies also have come to the realization that they don't possess the expertise they believe necessary to manage those plans.
“Pension accounting can create a fair amount of variability and volatility into our financial results. For us, we looked at it from the standpoint of, how can we address this liability and transfer it to an insurance company?” said Philip Fracassa, executive vice president and chief financial officer at The Timken Co., Canton, Ohio.
Timken purchased a group annuity contract from Prudential in January, reducing its pension liabilities by $600 million. Global plan assets had totaled about $2.1 billion at the end of 2014.
“We're not money managers by trade,” Mr. Fracassa said. “We make bearings and power transmission components.”
After the unprecedented activity of the past three years, even more activity in the arena of lump-sum offers and group annuity buyouts is expected.
Brad Howard, New York-based senior manager at Deloitte Consulting LLP, said that an expected update in the IRS mortality tables to determine lump sums, possibly coming as early as 2016, would give corporate plans a “very big impetus to act in 2015 if you're considering a lump-sum change.”
“Even those that have done one since 2012, a number of those will actually operate another window in an attempt to get ahead of the assumed IRS change,” Mr. Howard added.
Low interest rates continue to hamper companies' ability to keep liabilities under control, and while updated mortality tables compound that, they provide an appeal to choosing a group annuity buyout, said Sean Brennan, New York-based partner in the financial strategy group at Mercer LLC.
“On the relative perspective, the fact that many plan sponsors have adopted updated mortality tables, the pension liabilities look a whole lot more like insurance liabilities so annuity buyouts are relatively more attractive,” Mr. Brennan said.
With so many companies interested in transferring risk, there might be other issues, said Ari Jacobs, Aon Hewitt's global retirement solutions leader.
“There are limitations to the market,” he said. “So, for example, if (there are) tons of deals, there's not enough administrative capacity to run through the market, meaning we would have limitations of how many deals could be run at a time. That's just people resources.”
“There are capacity limitations against particular types of liabilities,” Mr. Jacobs added. “What I mean by that is, certain liabilities may have more potential insurance bidders than others, so if you're placing a standard retiree-only deal of a big size, you'll have bidders there. If you're looking for something very specialized, very unique with the more complex type of liabilities, you might have problems finding multiple insurers.” n