While many U.S. corporate defined benefit plan sponsors have frozen their plans to benefit accruals or transferred their liabilities to insurance companies, they still represent hundreds of billions of dollars of investible assets and reports of their demise are premature, experts say.
It was 10 years ago in June that General Motors Co. stunned the institutional investing industry when the automaker announced a $29 billion pension buyout deal with Prudential Insurance Co. of America.
The event seemingly portended seismic implications for the U.S. corporate defined benefit plan landscape, which had already experienced well over a decade of plans closing and freezing benefit accruals. It was by far the largest such transaction completed in the U.S. and remains so, and it initiated a growing, decadelong trend of purchasing annuities to transfer pension liabilities.
The significance of the trend was reiterated in September when International Business Machines Corp., Armonk, N.Y., purchased group annuity contracts from Prudential and Metropolitan Life Insurance Co. to transfer a total of $16 billion in U.S. defined benefit plan liabilities. It was the largest buyout since the GM deal and was the second largest of all time.
IBM spokesman Timothy F. Davidson said the company had nothing to add to what's been publicly disclosed in a Sept. 13 8-K filing with the SEC.
According to data from research firm LIMRA, since the beginning of 2013, U.S. corporate DB plans transferred a total of $191.6 billion in liabilities to insurance companies through June 30 of this year, and the September IBM deal brings that total to over $200 billion through Sept. 30.
However, that total volume still pales when compared with the total assets still remaining among corporate plan sponsors, said Matt McDaniel, Philadelphia-based partner in Mercer's wealth business, in a phone interview.
For the majority of the corporate pension plan market that has decided to close plans and freeze benefit accruals, they continue to hold their assets.
"It is a long farewell, but it is a very long farewell," Mr. McDaniel said. "Just because these plans are going away eventually, eventually is a very long time. There is typically another 50 to 75 years where they are going to be paying out benefits to participants."
It means for decades to come, U.S. corporations on some level will still have to make investment management decisions regarding these asset pools.
"Some have the impression that DB plans are totally dead and gone, but that's not the case," said J. Mark Iwry, former senior adviser to the secretary of the Treasury and deputy assistant director for retirement and health policy and currently non-resident senior fellow at the Brookings Institution, in a phone interview. "While private-sector employers in the U.S. and abroad have been continually freezing and risk-transferring away from DB plans for many years, existing DBs continue to cover plenty of public-sector and union-represented employees, and some non-union private-sector employees."
Mr. McDaniel also noted that there are significant administrative hurdles in completing pension buyout deals, even down to the task of simply finding all legacy participants who are due to receive benefits. Many of the largest corporate pension plan sponsors have to deal with anywhere from two to 40 legacy DB plans inherited due to firm acquisitions over the years.
Even if those hurdles are eclipsed, it does not mean insurance companies could simply take on the liabilities en masse.
"On the insurer side too, if magically the stars aligned in 2023 and 50% of remaining plan sponsors said 'I am ready to terminate the plan,' there is good capacity in the insurance system but not $1 trillion in capacity in the system in one year," Mr. McDaniel said.
It will have to be an orderly exit from DB plans that will likely take years, if not decades, he said.
However, even though hundreds of billions of defined benefit plan assets are still held by U.S. corporations, it is important to consider that private-sector DB options are generally not considered at all by businesses, said Joshua Gotbaum, guest scholar in the Economics Studies Program at the Brookings Institution and a former executive director of the Pension Benefit Guaranty Corp., the federal agency created by ERISA, in a phone interview.
"Unfortunately, a number of unfortunate judgments were made," Mr. Gotbaum said. "One was that we so zealously guarded the form of traditional pension plans that we made them less attractive than individual account plans and so the world moved to individual account plans."
"We also actually unfortunately made it easy for corporate businesses to get out of their pension plans by selling their obligations to their employees at a discount, the so-called lump-sum effort," Mr. Gotbaum said, "and to my mind that one was much more pernicious than the transferring of risk to insurance companies because transferring the risk to insurance companies, you actually move it to a viable financial institution that will keep paying the monthly amount."
Mercer's Mr. McDaniel estimated a total of somewhere between $100 billion and $200 billion has been distributed to participants over the past decade via lump-sum offers.
The problem with moving all that risk to consumers and eliminating a guaranteed lifetime retirement income is simply that "most people don't understand anything about finance," Mr. Gotbaum said. This has resulted in a decided lack of uproar over the decline of the defined benefit plan, primarily because companies provide information to participants that are "written by lawyers intentionally to obscure what's (coming) down the pike," Mr. Gotbaum said. "The only way you get an uproar is if basically the workers are represented by a union and the union itself is still in the position of some strength."
"One of the fundamental challenges for our society is when it comes to things that are so complicated like finance that we know consumers don't understand, who's going to protect consumers? The death of ERISA, the death of traditional pensions, means employers are not going to do it for employees," Mr. Gotbaum said.
He cited how the creation of the Consumer Financial Protection Bureau during the Obama administration was an important step in making a statement that someone had to protect consumers. However, regulation in the retirement space is not permitted by the bureau.
"There isn't an uproar because this is so complicated, because people don't understand what's happened to them until years after it has happened," he said.
Even without the uproar, the tide could potentially turn.
Serge Agres, Boston-based managing director and head of the liability-driven investment practice at Cambridge Associates LLC, said in a phone interview that some may realize that the environment has changed since the Pension Protection Act was enacted more than 15 years ago.
"Contribution requirements were volatile and people didn't understand how to manage risk effectively. LDI and liability hedging are now much more refined," Mr. Agres said. "Contribution requirements now with the passage of ARPA (American Rescue Plan Act of 2022) and the Infrastructure (Investment) and Jobs Act are really minimized. The main risks for pension plans, which are balance sheet volatility and large contribution requirements, those risks have now been minimized," he said.
