Busy quarter expected for pension risk transfer

Corporate pension plan sponsors are continuing to shed liabilities through lump-sum offers and group annuity purchases from insurers, leading some consultants to predict an eventful fourth quarter.

“From an economic perspective, looking at the landscape I also think it supports potentially being a busy fourth quarter. Interest rates are about level with where they were this time last year. I think the mindset of companies continues to be very interested in risk transfer,” said Tim Geddes, Detroit-based director at Deloitte Consulting, in a telephone interview.

In the past month alone, a handful of companies announced significant moves to further reduce risk in their pension plans.

• J.C. Penney Co., Plano, Texas, which already offered a lump-sum window in 2012 to former employees who had yet to retire, made an additional offer to retirees; and Newell Rubbermaid Inc., Atlanta, announced its second such offer in as many years to former employees who had yet to retire.
• Lincoln Electric Co., Cleveland, announced Aug. 19 it purchased a group annuity contract from Principal Financial Group to settle about $425 million in outstanding U.S. pension liabilities for 1,900 U.S. retirees and beneficiaries who retired on or before June 1. A Lincoln Electric spokeswoman said in an e-mail the company's U.S. Retirement Annuity Program had about $900 million in assets, and a funding ratio of 106%.

• West Pharmaceutical Services Inc., Exton, Pa., announced Sept. 10 it purchased a group annuity contract from MetLife to settle about $140 million in pension liabilities. As of Dec. 31, its pension fund assets totaled $322.3 million, while projected benefit obligations totaled $398.5 million, for a funding ratio of 80.9%, according to the company's most recent 10-K filing.

Neither company would comment on the premium paid.

Malcolm Hodge, Boston-based senior partner at Mercer LLC, said his firm expects about $10 billion in buyout deals this year — about the same as last year — but perhaps a greater volume of deals among smaller plans.

“There's much more of a groundswell of acceptance among plan sponsors that a buyout is an accepted thing,” Mr. Hodge said in a telephone interview. “Whereas two or three years ago, some plan sponsors had qualms about the security of carriers.

“There is a lot of interest in our clients and other companies in exploring buyouts especially for retirees. They're not at the point of pulling the trigger (but) they are absolutely exploring at a very high level.”

J.C. Penney is one of several companies that have established a gradual, step-by-step approach to trimming pension liabilities.

The company's first lump-sum offer in fall 2012 went to 35,000 vested former employees who had yet to retire. About 71% took the offer, and the company said it made a total of $439 million in lump-sum payments in December 2012.

Of those employees that declined the offer, about 8,000 have been given the offer again in tandem with the retiree offer, announced Sept. 9.

J.C. Penney reported $5.5 billion in assets and a projected benefit obligation of $5.3 billion, for a funding ratio of 104% as of Dec. 31, in its most recent 10-K filing, making the company a candidate for a group annuity purchase.

Joey Thomas, company spokesman, said in an e-mail that the company monitors “the annuitization market on an ongoing basis to evaluate if there are opportunities to further derisk the pension plan in a cost-efficient manner.”

New developments in 2015 might affect the approaches companies take in exploring pension risk transfer, including recent market volatility and two big announcements from the Internal Revenue Service, which banned lump-sum offers to retirees and extended the use of 15-year-old mortality assumptions.

Ari Jacobs, global retirement solutions leader at Aon Hewitt, Lincolnshire, Ill., said overall he expects the level of activity for 2015 to be similar to 2014, but “we definitely heard of a few organizations pulling back because of the recent market volatility that's gone on,” Mr. Jacobs said.

Still, he said, “I think many of these companies have ... hedged many of these risks out already.”

Lump-sum offers to terminated, vested employees who have yet to retire continue to be the most common form of pension settlement. But the biggest hurdle to such offers is funded status. In order for companies to complete such a transaction, the Pension Protection Act of 2006 requires a funding ratio of 80% or more.

The estimated aggregate funded status of pension plans sponsored by S&P 1500 companies was 81% last month, little changed from 79% at the end of 2014, according to Mercer.

Matt Herrmann, St. Louis-based leader of Towers Watson & Co.'s retirement risk management group, said companies have offered about 500 lump-sum transactions since activity began accelerating in 2012. He did not provide specifics on the amount of transactions this year, compared to 2014.

Mr. Herrmann said while the equity markets have not affected funded status too badly, he said it might affect companies' ability to offer lump-sum windows. “We have the same catalysts as before, mortality, PBGC (premiums), the general desire to get out of the DB business, but I think there's still an economic barrier around the funded status,” he said.

In addition to the funded status barrier, the IRS on July 9 eliminated the ability of companies to offer lump-sum windows to retirees. Previously, such offers were allowed, but with the requirement of an IRS private letter ruling.

Mr. Jacobs said “organizations are still going through (lump-sum windows for retirees) this year, because they were "grandfathered' into it, but that's an area we certainly expected to be part of the pension risk transfer landscape.”

Mr. Herrmann said: “It does highlight that regulatory bodies are paying very close attention to this marketplace and there is an element of unpredictability the IRS introduced.”

However, next year could see an uptick in lump-sum transactions after the IRS' recent announcement that it would apply 15-year-old mortality assumptions for lump-sum payouts until 2017, giving companies another year to improve funding ratios and make lump-sum offers before they presumably become more expensive.