International Paper takes calculated journey to annuity buyout

International Paper Co.'s journey to an annuity buyout began in 2004, said Glenn L. Landau, the Memphis, Tenn.-based company's senior vice president and chief financial officer, in a telephone interview.

"Back in 2004 when we closed the plan to new entrants and began this evolution, it was trying to come to terms with this risk mismatch we see across corporate America carrying DB plans, given the fact that there's a risk mismatch between pensions and liabilities," Mr. Landau said.

"It goes back to just the principles around the only way we could close this gap over time and lock it down and take that risk off the table. We could earn our way out of it, contribute our way out of it or wait for interest rates to rise," Mr. Landau said.

The U.S. defined benefit plan's funding ratio has hovered near 80% in the 13 years since the plan closed in 2004. As of Dec. 31, 2004, assets totaled $6.745 billion, while projected benefit obligations totaled $8.294 billion, for a funding ratio of 81.3%, according to that year's 10-K filing with the SEC. In the most recent 10-K filing, as of Dec. 31, 2016, plan assets totaled $10.312 billion, with PBO totaling $13.683 billion, for a funding ratio of 75.4%.

"We put together a comprehensive (liability-driven investing strategy) that allows us to have our cake and eat it, too, which hasn't been easy," said Mr. Landau. "We've been hedging inflation, allowing us to have more growth assets in our portfolio, and that has been a good mix, and as we close the gap, we increase the hedge on the inflation side of the game."

As of Dec. 31, the actual allocation of the U.S. plan was 51% equities, 27% fixed income, 12% other and 10% real estate.

International Paper announced in February 2014 that it would freeze benefit accruals in the U.S. plan as of Dec. 31, 2018, and in the spring of 2016 offered a lump-sum window to former employees who were vested and had yet to retire, resulting in the offloading of $1.2 billion in pension liabilities.

When 2017 began, Mr. Landau said they asked, "How do we go forward and how to we continue to derisk the plan?"

In the third quarter, it issued a $1 billion debt offering, which partially paid for a $1.25 billion contribution and was expected to eliminate any need to make further required contributions over the next five years.

"Inside the plan we looked at around $1.3 billion of liabilities that turned out to be about 45,000 participants. These were participants in general who made up to $450 a month, so again the low-end range, with the assumption based on demographics and other complementary strategies, that … this might be a valuable group for these insurance companies and took it out for bid and we had 14 insurance companies look a look at it — 10 declines and four stayed in."

Eventually, IP announced on Oct. 2 the purchase of a group annuity contract from Prudential Insurance Co. of America.

"We did quite well. This was clearly a fit," Mr. Landau said. "It was a competitive process and we were able to come out with (a premium of) 98% of the PBO."

"We're certainly not done. (In the annual report) we'll show a much smaller underfunded piece of the pension at the end of the year. Our LDI is well defined," Mr. Landau said. "We're not in a game on betting on interest rates. We failed on that miserably. We've had excellent performance, which helps itself to close the gap," as well as the hedging, which he said triggers both as the funding ratio improves and on a fixed timeline.

"Of this last transfer of risk, we're looking at other pockets quite frankly of our constituents and we're looking (at retirees with monthly benefits of) up to $500, maybe $1,000. We've had some work done with Willis Towers Watson, and we can see returns."

"It's a good experience for International Paper. We have more to do, but we are aligned at the board level and the business level and we are ultimately more competitive at the corporate level," Mr. Landau said.​