Lockheed Martin clears way for others with rare buy-in

In completing a pension buy-in transaction, a rare move for U.S. corporations, Lockheed Martin Corp. has opened the door for others to follow as corporate pension fund executives look for ways to reduce risk in their defined benefit plans, industry observers said.

The Bethesda, Md.-based defense and aerospace company announced Jan. 29 it had completed two group annuity purchases to reduce risk in its U.S. defined benefit plans, which as of Sept. 30 had $35.2 billion in assets.

The first was a traditional buyout, transferring the responsibility to pay benefits for about $1.6 billion in U.S. pension plan liabilities to Prudential Insurance Co. of America. Buyouts have been a relatively common transaction in the U.S. since 2012 when General Motors Co., Detroit, transferred $29 billion to Prudential.

The second was a buy-in transaction. Lockheed Martin purchased an $810 million group annuity contract from Athene Annuity and Life Co., which will reimburse Lockheed Martin for benefit payments the plan will make to its retirees and beneficiaries. Both transactions took place in December.

John Mollard, vice president and treasurer at Lockheed Martin, said in a telephone interview that the process began with the company's $5 billion in contributions to its pension plans in 2018.

Motivated by the passage of the Tax Reform and Jobs Act, which dropped the corporate tax rate to 21% from 35%, Mr. Mollard said the company decided to accelerate its contributions to take advantage of the higher tax deduction that was set to expire Sept. 15, 2018.

The discretionary contribution allowed the company to have enough total assets available compared to its $43 billion in U.S. DB plan liabilities to make the cost of the transactions palatable.

"Now we can make transactions without having any sort of impact on our income statement or operating cash flows," Mr. Mollard said of the company's strategy once the contribution was made. "If we're ever going to start putting our toe in the water and start going out on the (pension risk transfer) market, now would be a good time to start."

About 9,000 retirees and beneficiaries from discontinued operations are affected by the buy-in. Lockheed Martin spun off those retirees and beneficiaries into an entirely new pension plan that it intends to terminate.

"One of the downsides of doing a termination is the time gap between when you spin out — and we spun out the retirees in a new plan in a nanosecond before 12/31 — and in theory you then start the termination process with the IRS, which can take 12 to 18 months," Mr. Mollard said.

He gave adviser Willis Towers Watson PLC credit for suggesting the buy-in, which he said locks in the cost of the benefits and eliminates the volatility of the liabilities that could occur in time frame of terminating the plan either from market volatility or interest rate fluctuations because Athene will be reimbursing Lockheed Martin for the benefits it pays out during the course of the buy-in contract.

Matt Herrmann, St. Louis-based leader of the retirement risk management group at Willis Towers Watson PLC, said there is a thirst for innovation in the pension risk transfer marketplace.

Different plans "have different types of problems," Mr. Herrmann said in a telephone interview, "and we have a market where the insurance carriers are willing to think about innovation a little bit more aggressively and look at the alternatives (to a traditional buyout)."

"Like, certainly of the buy-in they want the longevity protection," Mr. Herrmann said. "There might be accounting issues they're trying to manage."

With $43 billion in total DB plan liabilities, settling less than $3 billion at one time might seem like a small step, but Mr. Mollard said Lockheed Martin is looking at a series of marketable transactions.

"I would look at this from a strategic point of view," Mr. Mollard said. "You're kind of going to want to look at trying to figure what a marketable transaction size is."

You want to avoid "such a large transaction where there's (only) one company or two companies that can complete it. We want marketable blocks that we could take as a series of transactions over a 10-year horizon," Mr. Mollard said.

In the buy-in transaction, Lockheed Martin plans to begin the termination process of the new plan in mid-2019. Presuming the company receives IRS and regulatory approval, the termination would be complete in mid-2020 and the annuity contract with Athene would then be converted to a buyout.

In the U.S., buy-ins have been far less common than in the United Kingdom, for example, because they do not address U.S. plans' desires to reduce the headcount in their plans. In September, to name one U.K. transaction, British Airways insured a record £4.4 billion ($5.7 billion) in liabilities of its Airways Pension Scheme, Hounslow, England, in a buy-in with Legal & General. In the U.S., Mr. Herrmann believes there has been a total of less than $500 million total in buy-ins before Lockheed Martin's transaction.

Up to now, Mr. Herrmann said, the top priority of U.S. corporate plan sponsors has been to reduce their Pension Benefit Guaranty Corp. premiums.

"The buy-in isn't necessarily new," Mr. Herrmann said. "It just hasn't been executed in the U.S. at any material level and part of the challenge historically when you would execute a buy-in, it would not necessarily address the PBGC premiums and when folks would look at various solutions, a lot of them would ask, 'Hey, how do we reduce the cost of these?'"

PBGC fixed-rate premiums, which are measured per participant, are now $80 compared to $35 in 2012 before the passage of that year's Moving Ahead for Progress in the 21st Century Act. That law established the premium increases in the face of growing agency deficits.

The buy-in, however, might become more prevalent.

Ari Jacobs, Aon PLC's Chicago-based senior partner and global retirement solutions leader, said U.S. corporate sponsors chose buyouts over buy-ins because the costs are relatively close, but he added that more buy-ins could be coming.

"We're likely to see over time these 'pre-buyout' buy-ins where they're structuring it in a way to get an insurance company to get engaged earlier on," Mr. Jacobs said.

Mr. Herrmann echoed those sentiments, because sponsors could find locking in a price desirable.

"Elements of that could be attractive here in the U.S. market as well," Mr. Herrmann said.