Before the Great Recession, General Motors Corp. was sometimes described as a pension fund that owned an automobile company, so great were the company's pension assets and liabilities relative to its net corporate assets.
The pension liabilities represented a financial risk to the company, and much of that related to its retirees. In 2012, the company bought a group annuity contract for the 118,000 retirees in its $33 billion U.S. salaried defined benefit plan. The buyout reduced the automaker's pension obligations by $26 billion. At the time, GM had $94 billion in U.S. DB assets and $107 billion in liabilities.
GM's move has been followed by many others, large and small, and it continues into 2017. As of the end of the second quarter, the value of pension-related annuity sales since 2011 was $82.4 billion, according to LIMRA.
Some, including members of Congress, have expressed concern that retirement benefits might be jeopardized by the transfer of the liabilities (and attached assets) from corporate sponsors to insurance companies.
In 2014, Sen. Ron Wyden, D-Ore., and then-Sen. Tom Harkin, D-Iowa, urged the Labor Department, Treasury Department, Pension Benefit Guaranty Corp. and Consumer Financial Protection Bureau to establish rules to protect employees and retirees in such buyouts.
Karen Friedman, executive vice president and policy director of the Pension Rights Center, asked in congressional testimony: "How secure are the annuities that are being purchased in plan terminations? What is the exposure of the insurance companies that are taking on these large group annuities?"
But these transactions make sense for employers and employees. The transfer to the insurance companies places the liabilities with organizations that specialize in managing them. They have expert actuaries working full time calculating costs and risks of annuities for the insurers, and they have specialists investing the assets.
Managing assets and liabilities is a distraction for most companies, not a core area of expertise. Minimizing that distraction can improve corporate efficiency.
Also, purchasing annuities for retirees take those liabilities off the PBGC's shoulders and reduces the insurance premium the companies owe that agency.
The annuities likely will be more secure with the insurance companies than the PBGC, which does not have a guarantee of funding from the federal government and has a large unfunded liability.
The annuities are backed by premiums from the companies buying the annuities and protected by the huge asset bases of the insurance companies themselves and state guaranty agencies designed to step in if an insurer should become unable to pay its obligations. State regulators also monitor insurers and their financial health. The annuities are, in effect, triple guaranteed.
Given the low interest rates now, buyout annuities are expensive, so not every company will consider buying. If rates rise, annuities will get cheaper, corporate liabilities will shrink, and more companies might find the strategy affordable.
That could be good for employers and retirees.