The pension risk transfer environment is still a positive one in 2015 despite lower interest rates, with a good number of firms making ideal candidates for performing such transactions, a report from RBC Capital Markets Life Insurance Research says.
RBC Capital Markets, in its report “Pension risk transfer: Despite lower rates, still a huge opportunity,” identified 210 companies with $853 billion in projected benefit obligations that could be good candidates for pension risk transfer. The report did not specify a time frame. This is despite funding ratios falling at the end of 2014 due to discount rates decreasing in the face of a 90-basis-point drop in the yield on the 10-year Treasury note, as well as many companies changing their mortality tables as a result of the new Society of Actuaries standards released last year.
Of that total, RBC names 29 “ideal” U.S. corporate pension plan candidates with combined projected benefit obligations of $160 million for pension buyouts.
The ideal candidates are based on 2014 figures in their annual reports, including U.S.-only projected benefit obligations, funding ratio, cash needed for the transfer of liabilities to an insurance company and PBO as a percentage of market capitalization.
The most ideal candidate, according to RBC, is CenturyLink Inc., Monroe, La., whose PBO of $15.042 billion is 76% of the company's market capitalization. The company's funding ratio is 84%.
The next ideal candidate is Domtar Corp., Montreal, whose $1.72 billion in U.S. PBO is 60% of the company's total market capitalization.
Companies such as Motorola Solutions Inc., Schaumburg, Ill., have cited the size of their pension liabilities vs. their market caps as a primary driver in the decision to transfer pension liabilities to an insurance company.
Motorola Solutions Treasurer Robert O'Keef said in a September interview with Pensions & Investments following the announcement of the company transferring $3.1 billion to Prudential Life Insurance Co. of America, that “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.”
The 29 candidates are ideal, according to RBC, because transferring their liabilities to an insurance company would be “below the cash cost faced on average by other large companies seeking to do similar pension transfer deals.”
RBC's analysis showed that United States Steel Corp., Pittsburgh, had the highest PBO as a percentage of market capitalization of all the 210 companies analyzed.
The company's $7.319 billion in obligations was 224% of the company's total market cap, and leads RBC's list of companies that could transfer their pension liabilities “for a cash cost equal to less than one years' worth of their cash from operations.” U.S. Steel has a funding ratio of 87%.
The other company whose PBO was more than 100% of market cap was Cliffs Natural Resources Inc., Cleveland. The company's $1.227 billion in projected benefit obligations totaled 174% of its market cap. The company's funding ratio is 77%.