Motorola and Bristol-Myers Squibb the Latest to Turn Over Pension Obligations to Prudential
In an effort to reduce the volatility and risk associated with defined benefit pension plans, Motorola Solutions and Bristol-Myers Squibb have announced they will transfer significant pension assets and liabilities to The Prudential Insurance Company of America. Following an industry trend, the firms expect to better manage ongoing accounting cost variations associated with pension plan maintenance while ensuring long-term financial security to their retirees.
Both have agreed to purchase group annuity contracts from the financial services firm—which currently manages the pension benefits of 1.6 million participants at more than 5,700 companies—following in the footsteps of Verizon Communications and GM, who similarly conducted massive transfers of their own pension plans in 2012.
This transfer of payment obligations is also known as “pension terminal funding.” When this happens, a plan sponsor transfers a defined amount of outstanding pension obligations to an insurance company in exchange for an advance premium and administrative costs. The insurer then assumes liability for the payments, and the transferred pension obligations are removed from the balance sheet of the original plan sponsor.
Motorola’s Transfer - Fast and Furious
Hammering out the details of Motorola Solutions Pension Plan’s transfer—the third largest annuitization ever done—lasted less than six months in a process that traditionally takes 12 to 18 months.
Motorola Solutions' corporate vice president and treasurer Robert O'Keef, who was the director of capital planning at GM from 2004 through 2006, brought in former GM colleagues and hired a team of advisers to help with the details of the agreement. He attributes the accelerated timeframe to the sale of Motorola Solutions’ enterprise business to Zebra Technologies at the end of this year; an insurance market that was highly receptive to options the company was seeking; and the relative liquidity of the pension plan's portfolio. The plan was closed in 2005 and frozen in 2009.
The transaction is expected to be completed in 2014, with Prudential Insurance assuming responsibility of benefit payments in early 2015. As part of the agreement, Prudential will pay and administer future benefits to the approximately 30,000 Motorola retirees who currently receive payments. Motorola said that it plans to contribute $1.1 billion in cash to its U.S. pension plans in 2014.
Motorola Solutions also made a lump-sum offer to about 32,000 vested participants who have yet to retire from the workforce but are no longer working at the company as of June 30, 2014. The application window period began October 1 and ends November 7 with payouts occurring on December 19, 2014. Total lump-sum payments will be capped at $1 billion, with the smallest amounts qualifying first.
There are no changes for active employees who participate in the plan. Motorola offered the pension plans to U.S. employees hired before January 1, 2005, with no additional benefits accrued for participants as of March 1, 2009.
Liability for Motorola Solutions’ plan currently stands at about $8.4 billion. These actions are expected to cut ongoing U.S. pension obligations in half to about $4.2 billion, according to the company.
Bristol-Myers Squibb Also Safeguards its Plan
Although on a smaller scale, the announcement from Bristol-Myers Squibb is still significant. The company settled $1.4 billion in pension obligations through the purchase of a group annuity contract from Prudential Insurance for about 8,000 U.S. retirees and their beneficiaries who started receiving monthly retirement benefit payments on or before June 1, 2014. Because Bristol-Myers Squibb’s U.S. Retirement Plan has a strong financial position, no additional cash contributions were required by the company to fulfill obligations.
Fiduciary Counselors helped Bristol-Myers Squibb objectively select the most secure available annuity as defined by the U.S. Department of Labor standards. The Prudential contract provides an additional safeguard by segregating assets in a separate account dedicated to the payment of benefits to plan retirees and their beneficiaries.
There will be no change to the monthly retirement benefit payments currently paid out. All other plan participants—including those with accrued benefits, retirees who participate in collectively bargained plans, the Puerto Rico plan, and certain retirees with variable benefit payments—will remain in the company’s pension plan.
When the transfer is completed this December, Prudential will assume full financial responsibility for making the annuity payments provided under the group annuity contract.
A Growing Trend
Since 2012, industry experts have expected more pension transfer deals, deeming them one of the greatest growth opportunities for large and financially strong life insurers.
A run-up in the stock market or rising interest rates can improve the funded status of the plan as expressed in terms of current liability without affecting the value of future pension payments to retirees, the accumulated benefit obligation (“ABO”). Also, all private sector defined benefit plan sponsors must pay insurance premiums, which have been increasing, to the Pension Benefit Guaranty Corp. (PBGC). Those factors, in addition to mounting liability costs arising from retirees’ longer life spans, often spur companies to look for ways to move employee-benefit costs off their books.
Yet, the move to transfer pension plans are a concern for some retirees because their benefits no longer carry pension guarantees from the PBGC. But if Prudential 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.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA 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.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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Disclaimer: 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.