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Pension Funds

Risk transfer activity still barreling ahead

Sponsors eager to derisk while market conditions stay on their good side

Joseph Nankof thinks the PBGC premium might be a reason for many derisking moves.

Pension risk transfer activity shows no signs of abating as corporations make final derisking moves of the calendar year, with some doing second or third transactions in the favorable economic environment.

A flurry of disclosures appeared at the beginning of November in third-quarter earnings filings with the Securities and Exchange Commission, revealing some companies are shedding the majority of the pension liabilities of their retirees through group annuity purchases from insurance companies. The trend in the last several years has been to transfer only the liabilities of retirees and beneficiaries who receive low monthly benefits.

Archer Daniels Midland Co., Chicago, is the highest-profile new entry to the pension buyout market, having closed on Nov. 2 the purchase of a group annuity contract from Prudential Insurance Co. of America. That transaction affected the 3,800 retirees and beneficiaries who began receiving benefit payments on or before Jan. 1, 2018, spokeswoman Paula Heinkel said in an email.

About $500 million in U.S. pension liabilities were shed in the deal, a significant portion of the $3.1 billion in total pension plan liabilities that ADM reported as of Dec. 31, 2017, in its most recent 10-K filing. ADM had $2.448 billion in assets as of that date, for a funding ratio of 78.7%.

"I think it remains a robust market with a strong level of demand from plan sponsors and reasonable supply from insurance companies," said Matt Herrmann, St. Louis-based leader of the retirement risk management group at Willis Towers Watson, in a telephone interview.

A recent LIMRA Secure Retirement Institute sales survey projected $23 billion in group annuity sales in 2018, equal to the prior year's reported volume. Companies have traditionally made the most transactions during the fourth quarters of their calendar years. In 2017, for example, of the $23 billion in transactions, $11.1 billion took place in the fourth quarter.

Other notable transactions disclosed in recent SEC filings were:

  • AK Steel Corp., West Chester, Ohio, purchasing a group annuity contract from Massachusetts Mutual Life Insurance Co. to transfer about $280 million in pension liabilities, the third such transaction for the company, having completed two buyouts with an undisclosed insurance company in 2016.
  • TJX Cos., Framingham, Mass., purchased a group annuity contract from an undisclosed insurance company to transfer $207 million in U.S. pension plan liabilities.
  • Devon Energy Corp., Oklahoma City, purchasing a group annuity contract from an undisclosed insurance company to transfer about $190 million of its pension plan liabilities.
  • Materion Corp., Mayfield Heights, Ohio, purchasing a group annuity contract from Mutual of America Life Insurance Co. to transfer about $111 million in U.S. pension liabilities, representing 43.4% of total liabilities.

FedEx transfers $6 billion

By far the largest transaction of 2018 so far (and the largest since 2012) has been Memphis, Tenn.-based FedEx Corp.'s purchase in the second quarter of a group annuity contract from Metropolitan Life Insurance Co. to transfer about $6 billion in U.S. pension plan obligations.

Other companies that have made recent disclosures are notable for how they have made or completed a second or third group annuity purchase.

International Paper Co., Memphis, Tenn., represented the highest-profile repeat transaction in 2018, purchasing in October its second group annuity contract from Prudential almost exactly a year after its first. The second purchase transferred about $1.6 billion in U.S. pension liabilities, representing the benefit obligations of about 23,000 retirees and beneficiaries who receive less than $1,000 in monthly benefits.

A year ago, International Paper transferred about 45,000 retirees and beneficiaries who received less than $450 in monthly benefits. Glenn L. Landau, the company's senior vice president and chief financial officer, said in an October 2017 interview they were already "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."

"We've seen a number of organizations go back to the well a second time," said Matt McDaniel, a Philadelphia-based partner in Mercer's wealth business, in a telephone interview. "In some cases, they might have done a smaller transaction for the first time to test the water, to see how the financials worked out, see what the participants' reaction was."

Joseph Nankof, founding partner, head of capital markets/asset allocation at Rocaton Investment Advisors LLC in Norwalk, Conn., said: "I'm not sure if they've always planned to do it in two phases. It might have been that initially they thought, 'Let's purchase annuities for small benefit participants because they were hitting the new PBGC premium cap.' Every participant you remove from the plan, you save on PBGC premiums," Mr. Nankof said.

Soaring PBGC premiums

Pension Benefit Guaranty Corp. premiums, both fixed and variable rates, have skyrocketed in the past seven years following passage of 2012's Moving Ahead for Progress in the 21st Century Act. The Map-21 law established the hikes to give funding relief to the PBGC in the face of growing agency deficits. The fixed rate, which is measured per participant, was $35 in 2012, but is now $74 per participant and will increase to $80 in 2019.

The PBGC's variable rates are determined by the funded status of a plan and is currently $38 per $1,000 of underfunding compared to $9 per $1,000 of underfunding just five years ago. The higher a plan's funding ratio, the more likely a company will be able to afford the premium that insurance companies charge for group annuity purchases, which can be as much as 5% over the projected benefit obligations that the company is transferring. But that could change as the number of insurance companies providing these services grows.

Mr. Nankof said that in 2019, as interest rates rise, funded status improves and the variable PBGC premium cost decreases, the incentive to transfer low-monthly-benefit participants to insurance companies may ebb, as the savings from lowering the fixed rate may not supersede the accounting and other costs of the transfer.

Perhaps by 2020, however, Mr. Nankof said there may be bigger annuity buyouts that may encompass a plan sponsor's entire retiree population.

"There's more of an opportunity to buy annuities at higher rates because they're better funded in general," he said, "but that's a bigger undertaking for plans and as a result it will take more time to assess the opportunity and the impact on the plan and the costs."