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Pension Annuitization Continues in De-Risking Trend


     By ERISA Benefits Consulting, Inc. ERISA, Pensions, Fiduciary Liability, Group Life/Health Plans, & Labor Relations Expert Witness

PhoneCall Mark Johnson, Ph.D., J.D. at (817) 909-0778


Expert Witness: ERISA Benefits Consulting, Inc.
Pension de-risking through annuitization continues to be a desirable option for plan sponsors looking to reduce or eliminate their risk for current and future liabilities. Kimberly-Clark Corp., the latest in a string of companies taking this approach, plans to reduce its projected pension benefit obligation by transferring payment responsibility for retirement pension benefits to two U.S. insurers.
Kimberly-Clark announced that effective June 1, retirement pension benefits owed to approximately 21,000 of its retirees will now come from the Prudential Insurance Company of America and Massachusetts Mutual Life Insurance Company. Kimberly-Clark’s benefit obligation was about $7 billion, while plan assets stood around $6 billion in 2014.

Although Prudential will be the sole annuity administrator for the benefit payments, each retiree's benefit will be split evenly between Prudential and MassMutual as a security reinforcement measure. Independent fiduciary State Street Global Advisors (SSGA) represented the retirees’ interests and determined a split transaction was the safest available annuity structure.

The annuity purchase will be funded with assets of Kimberly-Clark's U.S. pension plan. To support the transfer, the company expects to make a $400- to $475-million contribution funded by debt financing, incremental to the company's previous assumption for 2015 global defined benefit pension plan contributions of up to $100 million.

The Irving, Texas-based personal care corporation expects a non-cash pension settlement charge of $800 million in the second quarter of this year, but that will be excluded from the company's 2015 adjusted results. Kimberly-Clark expects that this transaction will likely save the firm around $2.5 billion without changing the monthly benefit of retirees, or damaging the company's financial outlook.

AON HEWITT SURVEY: PLAN SPONSORS REVIEW SETTLEMENT STRATEGIES

Kimberly-Clark follows in the footsteps of other companies, such as Motorola, Bristol-Myers Squibb, Verizon and General Motors, that have modified their pension plan obligations in light of rising insurance premiums and longer retiree life spans. A recent Aon Hewitt survey of 183 defined benefit plan sponsors indicated that as many as two-thirds of respondents intend to take further action in 2015 to rein in Pension Benefit Guaranty Corporation (PBGC) premium costs in the future, and most, are likely to elect settlement strategies to do so.

Based on the answers of defined benefit pension plan sponsors in the survey, it was revealed:

• Almost one-quarter (22 percent) of employers are very likely to offer terminated vested participants a lump sum window in 2015
• 19 percent plan to increase cash contributions to reduce PBGC premiums in the year ahead
• 21 percent are considering purchasing annuities for a portion of their plan participants

In addition, Aon Hewitt’s survey also found that plan sponsors are increasingly adjusting plan assets to better balance liabilities:

• More than one-third (36 percent) have recently made this shift
• 31 percent of the remaining group are very likely to do so in the year ahead

Other results from the survey are telling in terms of where companies currently stand with their pension plans:

• 74 percent have a defined benefit plan
• 35 percent have an open, on-going pension plan
• 34 percent have a plan that is closed to new hires
• 31 percent have a frozen plan
• 45 percent recently conducted an asset liability study
• 25 percent are somewhat or very likely to do a liability study in 2015 (of those that have not yet done so)
• 18 percent performed a mortality study in 2014; 10 percent plan to do so in 2015
• 26 percent currently monitor the funded status of their plan on a daily basis, up from just 12 percent in 2013

MANAGING PENSION PLAN VOLATILITY

Employers who plan ahead to better manage potential volatility of their pension plans—either through the purchase and transfer of annuities or through lump sum payment offerings—will be better positioned in the future. However, de-risking must not only balance the company’s bottom line but also protect retiree assets.

In 2013, the Department of Labor’s ERISA Advisory Council issued a report confirming recent increases in defined benefit plan de-risking activity. The Council addressed the need to view these transactions as more of a ‘transfer of risk’ because when the pension plan sponsor removes its risk, the transaction results in a corresponding increased risk for the other party—either the insurer in the event of an annuity purchase or in the individual participant in a lump sum payment offering.

The Council recommended that the Department of Labor:

1.) Clarify the scope of IB 95-1 to include that de-risking activity applies to any purchase of an annuity from an insurer as a distribution of benefits under a defined benefit plan, not just purchases coincident with a plan termination. Also to consider the development of safe harbors within the scope of the Interpretive Bulletin for such purchases.

2.) Require that a defined benefit pension plan provide participants with an option of a lump sum distribution within a specified window, with or without a separate option of the distribution of an annuity described in IB 95-1.

3.) Consider providing guidance under ERISA Section 502(a)(9) to provide clarity to plan fiduciaries regarding the consequences of a breach of fiduciary duty in the selection of an annuity contract for distribution out of the plan, including guidance for the term “appropriate relief” (e.g., whether monetary relief is available) and under what circumstances “posting of security” generally may be necessary.

4.) Provide education and outreach to plan sponsors.

5.) Consider the potential benefits of collecting relevant information regarding plan de-risking in the form of lump sum windows and annuity purchases outside the context of a plan termination.

IN SUMMARY

As ERISA-Benefits Consulting has reported in the past, pension transfer deals are likely to continue as plan sponsors look for ways to move employee-benefit costs and associated liabilities off their books.

Yet, the pension annuitization trend is a concern for some retirees because their benefits no longer carry pension guarantees from PBGC. If Prudential, Mass Mutual or another insurance company comes across financial challenges, shortfalls in payouts would be handled through state-mandated guaranty funds that are financed by the insurance industry.

ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA and pension expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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