United Technologies Corp., Farmington, Conn., plans to reduce its pension liabilities by roughly $1.8 billion through the purchase of a group annuity contract with Prudential Insurance Co. of America and a lump-sum offer to certain former U.S. employees.
Prudential will assume $775 million in pension liabilities for about 36,000 U.S. retirees in United Technologies' UTC Employee Retirement Plan and UTC Represented Employee Retirement Plan who receive a monthly benefit of $300 or less.
The deal is expected to close Oct. 12.
The lump-sum offer to vested former employees who have yet to retire is expected to reduce the company's pension liabilities by an additional $995 million. About 10,000 participants are expected to accept the offer. Payments will be made in late 2016.
The company's two U.S. defined benefit plans have in aggregate more than $24 billion in assets and a funded status of 88%.
Robin Diamonte, UTC's chief investment officer, said in an interview the buyout and lump-sum offer are part of an ongoing process to reduce pension volatility and cost. The pension portfolio already uses risk management strategies such as liability-driven investing, risk parity and portable alpha.
“When you look at the present value of administration cost and insurance premiums and also mortality and interest rates risk, it just made a lot of sense from an economic perspective to transfer those liabilities (for participants with small monthly benefits) to an insurer whose core business is managing retirement assets,” Ms. Diamonte said.
Ms. Diamonte said there are currently no plans to do another liability transfer.