Buyout activity up again after pandemic-induced pause

U.S. corporate pension plan buyout volume is picking up again after a drop in activity in the second quarter as plan sponsors shifted their attention to addressing the economic effects of the pandemic, industry experts said.

Still, even with a spate of recent activity, overall volume for 2020 should total about $25 billion, down from $28 billion in 2019, according to experts.

Much of that expected drop is the result of a slow second quarter. Buyout sales totaled $2.3 billion in the quarter ended June 30, down from $4.2 billion in the second quarter of 2019, according to the LIMRA Secure Retirement Institute's most recent survey of the 17 insurers that make up the U.S. pension risk transfer market.

For the first half of 2020, deal volume totaled $7 billion compared with $9 billion in the first half of 2019."The effect of COVID-19 on the economy has clearly had a negative impact on pension risk transfer sales, both in terms of volume and dollars," said Mark Paracer, assistant research director, LIMRA Secure Retirement Institute, in a Sept. 2 news release. "Fluctuating funding levels and the uncertain timing of the recovery have given employers reason to pause. While we believe social distancing and work-from-home transitions have also contributed to the sales decline, we expect increasing PBGC premiums and other administration costs will drive employers to seek PRT deals in the future."

Corporate funding ratios have fluctuated widely month by month since the economic impact of COVID-19 became clear in March. According to Mercer LLC, the estimated aggregate funding ratio of S&P 1500 companies was 81% at the end of March, rose to 83.2% at the end of April and then reached its nadir at 79% at the end of July before jumping a full 4 percentage points to 83% at the end of August.Ari Jacobs, Norwalk, Conn.-based senior partner and global retirement solutions leader at Aon PLC, said in a phone interview that the "market sort of completely paused in mid-March, early March."

While plan terminations that had been in the works for a year or more went forward, "the liftout market dropped off," Mr. Jacobs said.

Despite this, the majority of transactions continue to be liftouts, experts agree. In those cases, rather than terminating a plan completely and transferring the benefit responsibility of all participants to an insurer, the buyout simply "lifts out" a certain segment of the retiree population.

Matt McDaniel, Philadelphia-based U.S. leader of Mercer's financial strategy group, said the market is still strong.

"We're not seeing any insurers back out of deals, and we continue to see very attractive pricing," Mr. McDaniel said.

Mr. Jacobs agreed, and also noted that while pricing continues to be attractive, a wider range of prices has emerged because some insurers are "more comfortable in this volatile market."

According to Milliman's most recent study on PRT premiums, the estimated cost of group annuity purchases as a percentage of total pension liabilities fell to 102.3% in September from 102.9% in August. The change was the result of average accounting discount rates going up 2 basis points during September, while average annuity purchase rates increased 9 basis points, according to Milliman's latest pension buyout index study.

The drop in volume in second quarter was "less due to an inability of the market to function and more due to plan sponsors just being distracted," Mr. McDaniel said. "(Companies) had a hundred things on (their) agenda around business survival."

"In a lot of cases, pension management falls down a few rungs on the priority ladder," Mr. McDaniel said.

Following the second quarter, more companies resumed addressing pension management. Among the larger transactions since then were Moog Inc., East Aurora, N.Y., entering into an agreement Sept. 16 to purchase a group annuity contract from Metropolitan Tower Life Insurance Co., transferring $481 million in U.S. pension plan liabilities, and Kellogg Co., Battle Creek, Mich., purchasing a group annuity contract in October from an undisclosed insurance company to transfer about $470 million in U.S. pension plan assets and liabilities.

Both were basic retiree liftout deals, and while those types of transactions still make up the majority of deals, there is also a significant number of full terminations.

"One of the things that plan sponsors are moving to is an environment that's more driven by plan terminations," Mr. McDaniel said. "They're looking for more certainty in costs of the ultimate termination." If it's a typical plan sponsor, "you've got $1 billion of liabilities and $900 million in assets, you go to the board and say, 'We want to terminate the plans,' that billion dollars is very much an estimate."

Because terminations can take up to a year or more from initial corporate board approval until completion, that estimate can go awry very easily in a volatile environment that sees large swings in market returns as well as interest rates.

"It doesn't take much for that liability to move 10%," Mr. McDaniel said.

He said companies are more likely to purchase a buy-in contract to lock in rates and then convert that contract to a buyout once the termination is complete.

One recent example is Boise Cascade Co., Boise, Idaho, which announced plans in August to terminate its U.S. pension plan before the end of the year.

The lumber manufacturer and distributor signed a pension buy-in contract with Prudential Insurance Co. of America on Aug. 5, with an agreement to convert it to a pension buyout following a lump-sum offer to participants. That offer closed Oct. 31 and those who selected the lump sum will receive payments around Dec. 2.

"We were fortunate that our pension asset performance and movements in the interest-rate environment early in 2020 provided us the opportunity to transfer our remaining pension obligations to Prudential without making additional cash contributions to the plan," said Wayne Rancourt, Boise Cascade's executive vice president, chief financial officer and treasurer.

The process should be completed by the end of December, "which will complete our multiyear pension plan derisking journey," Mr. Rancourt said.

This final contract is at least the fourth one Boise Cascade has purchased from Prudential. Boise Cascade in April 2018 transferred $152 million in U.S. pension plan assets to Prudential, transferred an additional $125 million to the insurance company in August 2018, and transferred another $20 million in November 2019.

Mr. Rancourt said in an August 2018 interview that the first buyout transaction covered retirees and beneficiaries with smaller monthly benefit amounts, while the second transaction covered about 420 retirees and beneficiaries with larger monthly benefits. The November 2019 transaction affected about 100 retirees, spokeswoman Lisa Chapman said at the time.

Recent earnings reports have disclosed more buyouts, showing the market is picking up.

George Palms, Stamford, Conn.-based president of Legal & General Group PLC's U.S. retirement business, said that while the fourth quarter has typically been the busiest quarter of any given calendar year, that will be exacerbated more so in 2020 because of the lull in the second quarter.

"I think as we look to next year, the parade of plan terminations is going to continue, based on what we're seeing from interest in the market," Mr. Palms said. "On top of that, we'll see the continued secular trends of retiree deals."

Some companies, like Boise Cascade, are making second and sometimes third retiree liftout deals. Earlier in October, New York Times Co., New York, announced an agreement to purchase its second group annuity contract from Massachusetts Mutual Life Insurance Co. to transfer $235 million in U.S. pension plan liabilities and the responsibility for paying benefits to about 1,850 retirees and beneficiaries.

In 2018, New York Times transferred $225 million in liabilities from two of its U.S. pension plans and the benefit-paying responsibilities to MassMutual beginning for about 3,800 retirees and beneficiaries.

As of Dec. 31, New York Times' overall pension plan assets totaled $1.65 billion, while projected benefit obligations totaled $1.66 billion, for a funding ratio of 99.4%, according to the company's most recent 10-K filing.

The size of the New York Times deal is typical of current buyouts. Mercer's Mr. McDaniel said deals are topping out at $1.5 billion or $2 billion at the most right now.

Mega transactions like Memphis, Tenn.-based FedEx Corp.'s transfer of $6 billion in U.S. plan liabilities to Metropolitan Life Insurance Co. in 2018, are "not imminent right now," Mr. McDaniel said.