Number of plans passing off liabilities expected to rise

The number of pension risk transfer deals, including those involving full plan terminations, is expected to rise this year, sources said.

Even so, U.S. corporate pension plans are expected to transfer a total of about $25 billion in liabilities to insurance companies in 2019, consistent with last year.

The total for 2018 was about $27 billion, according to the annual LIMRA Secure Retirement Institute survey. Despite the similar dollar amounts, the number of deals will likely increase significantly, said Matt McDaniel, Philadelphia-based U.S. leader of Mercer LLC's financial strategy group, in a telephone interview.

"Last year had one particularly jumbo deal," Mr. McDaniel said, "This year we have probably a little bit more activity in terms of the number of deals but not quite as many mega jumbo deals."

In the first half of this year, the 17 insurance companies that sell annuity contracts to U.S. pension plans reported 190 contracts sold compared with 158 contracts during the same period last year, according to LIMRA data.

More than a quarter of last year's total dollar amount came from one deal. FedEx Corp., Memphis, Tenn., purchased a group annuity contract with Metropolitan Life Insurance Co. in 2018 to transfer about $6 billion in U.S. pension plan obligations, the largest U.S. transaction since Verizon Communications Inc., New York, purchased a group annuity contract from Prudential Insurance Co. of America in 2012 to transfer $7.5 billion in U.S. pension plan obligations.

So far, the largest announced U.S. transaction in 2019 not involving a full plan termination came from Deerfield, Ill.-based Baxter International Inc., which disclosed on Oct. 10 it had entered into an agreement with Prudential to purchase a group annuity contract transferring $2.4 billion in U.S. pension plan liabilities.

While not the kind of jumbo deal FedEx represented, Baxter's buyout transfers a full 50% of its global pension plan liabilities, which as of Dec. 31 totaled $4.8 billion, according to its most recent 10-K filing. Baxter officials did not reply to requests for further information.

"Risk management and pension risk transfer remain very much top of mind for plan sponsors," Mr. McDaniel said. "They are as interested as ever in evaluating the trade-offs of removing liabilities from the books vs. managing their risks internally."

The volatility in funded status, however, has forced some to put their plans on hold, said Michael Moran, New York-based senior pension strategist at Goldman Sachs Asset Management, in a telephone interview.

"(They) would have to make a contribution (they're) not ready to make at this point," Mr. Moran said.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies was 83%, down from 85% at the end of 2018, according to Mercer.

Market volatility also has added to client frustrations with the timing of actions on glidepath triggers in their liability-driven investment strategies, Mr. Moran said.

"Just when they had those moments in time, they were not able to act on a rise in funding levels at that time to effectuate a change in asset allocations," he said. "They kind of missed that window of opportunity to derisk and that's been a source of frustration for a lot of clients."

Mr. Moran said some plans lack the internal capabilities to make swift decisions in a volatile environment, which is why more plans are switching to outsourced chief investment officer firms.

One trend in the pension risk transfer landscape that has seen increased activity is full pension plan terminations, experts say.

"We definitely continue to see an increase in the numbers of the plan terminations," said Ari Jacobs, Chicago-based senior partner and global retirement solutions leader at Aon PLC, in a telephone interview. "I think some of that still relates to the large amount of funding that went into pension plans a year ago because of tax relief."

Many U.S. corporations made several years' worth of pension contributions before Sept. 15, 2018, the deadline to deduct portions of the contributions at the old corporate tax rate of 35%. President Donald Trump signed the Tax Cuts and Jobs Act, which reduced the rate to 21%, in December 2017.

This year saw the largest-ever voluntary U.S. pension plan termination when New York-based Bristol-Myers Squibb Co. terminated its $3.8 billion pension plan and transferred the full amount of liabilities through a group annuity contract purchased from Athene Annuity and Life Co.

There were 18,000 former employees who had yet to retire, 4,800 active employees, and 1,400 retirees and their beneficiaries in the plan.

Bristol-Myers Squibb had the advantage of being 100% funded. While interest rates have declined, increasing liabilities, most plans have managed to keep their funding levels up thanks to moderately strong investment returns, experts say.

Another recent completed termination was that of Brunswick Corp., Mettawa, Ill., which announced in August it had made settlement payments totaling $596 million to complete termination of two U.S. defined benefit plans.

The settlements included the purchase of a group annuity contract from an undisclosed insurance company and $77.1 million in lump-sum payments elected by eligible participants.

"We're seeing a tremendous uptick in plan terminations coming off of last year, generally speaking, with contributions up and funded status generally improved," said Kim Rosenberg, head of distribution and retirement solutions, U.S. retirement, at Legal & General America, Stamford, Conn., in a telephone interview.

"They took all the risk off their tables and they became well funded in a very short period of time," she said. "We've seen that begin to trickle in this year, a pretty significant increase in plan terminations year-over-year and we continue to see that next year and beyond."

Mr. Jacobs also sees an increase in plan terminations, noting that many plans have moved far enough along in their derisking paths that interest rate fluctuations don't make as much of an impact on funded status as they might have a few years ago.

It is still more common, however, that annuity purchases will transfer retirees only, which has traditionally been a more simple transaction.

"Quite a few clients have started with a single strand, a fairly simple retiree-only transaction instead of a full tranche to test the waters," Ms. Rosenberg said.

Most plans in general still transfer the liabilities of retirees whose monthly benefits are small, which in recent years have been executed primarily to reduce plans' head counts because of rising fixed-rate premiums to the Pension Benefit Guaranty Corp.

The fixed rate, which is measured per participant, was $35 in 2012, but is now $74 per participant and will be $83 in 2020.

Matt Herrmann, St. Louis-based head of the retirement risk management group at Willis Towers Watson PLC, said in a telephone interview that while reducing the impact of PBGC premiums is still a priority for plans, the shock of rising premiums has abated.

"Generally speaking, plan sponsors are going to make good economic decisions when you think about the economics of some of these administrative costs such as PBGC premiums," Mr. Herrmann said.

PBGC premiums are still driving activity, but the high premiums are "not as much of a surprise'' as they once were.

Overall, the pension risk transfer market has matured, Mr. Jacobs said, and he noted that despite the steady activity, the $25 billion in liabilities being transferred this year is still a tiny fraction of the overall U.S. pension plan liability landscape.