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Pension Funds

International Paper buys annuity for $1.6 billion in pension liabilities

International Paper Co., Memphis, Tenn., purchased a group annuity contract from Prudential Insurance Co. of America to transfer about $1.6 billion in U.S. pension plan liabilities, the company disclosed in an 8-K filing with the SEC on Monday.

The purchase transfers the benefit obligations of about 23,000 retirees and beneficiaries who receive less than $1,000 in monthly benefits, the filing said. The transaction was set to close on Tuesday. Participants will continue to receive their benefit payments from International Paper until the end of 2018, when Prudential will take on those responsibilities.

The transaction takes place almost exactly a year after a prior group annuity purchase from Prudential. On Oct. 3, 2017, International Paper closed on a group annuity purchase to transfer about 45,000 retirees and beneficiaries who receive monthly benefits of less than $450.

"This deal enables IP to better manage future costs and further reduce risk associated with maintaining the pension plan," said Thomas J. Ryan, company spokesman, in an email. "Prudential is a highly rated, experienced retirement benefits provider, and our retirees should feel good about the security of their benefits."

International Paper has been moving toward derisking its plan since announcing in February 2014 that it would freeze future benefit accruals as of Dec. 31, 2018. In 2016, International Paper offered a lump-sum window to about 47,000 former employees who were vested participants of the Retirement Plan of International Paper Co. but had yet to retire. The former employees represented about $3 billion in pension liabilities. Of that total, about $1.2 billion was paid out to about 25,000 retirees who took the offer.

In the third quarter of 2017, International Paper 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.

Glenn L. Landau, International Paper's senior vice president and chief financial officer, said in a November 2017 interview that the prior month's annuity purchase did not represent the end of the company's derisking efforts.

"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 at the time. "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," he said.

As of Dec. 31, U.S. pension plan assets totaled $11.368 billion, while projected benefit obligations totaled $12.895 billion, for a funding ratio of 88.2%.