Pension Risk Transfers Remain Strong in 2018
U.S. corporate pension plan sponsors continue to pursue a strategy called “pension risk transfer”under the favorable economic conditions of 2018. A pension risk transfer generally refers to the process by which a pension plan sponsor purchases a group annuity from an insurance company to cover pension payments and administration for all or a portion of plan participants.
The transaction reduces or eliminates the balance sheet risk associated with corporate pension plan liabilities, while still meeting all legal and funding obligations under the plan. The transfer typically applies to a “defined benefit” plan, where participants receive a payment based on promised benefit levels or seniority, as opposed a “defined contribution” plan like a 401(k) format where the participant only receives from a plan what they invested (adjusted for any interest, appreciation or loss, and expenses).
International Paper Co. and FedEx Corp. have both been active in offsetting pension commitments with group annuity programs. MetLife entered into an agreement earlier this year to manage $6 billion in FedEx pension obligations covering 41,000 plan participants. Prudential Financial Inc., another major player in the market, has agreed to manage two pension transfers in as many years for International Paper Co. with a total value of $2.9 billion and 68,000 participants.
AK Steel Holding Corp. reported the purchase of a “non-participating annuity contract” from an insurance company in its 10-Q for the period ended September 30, 2018. The transaction offsets $280 million in certain pension obligations for 5,400 retirees and beneficiaries. The annuity was purchased “to further our efforts to de-risk our balance sheet,” according to the SEC filing.
The TJX Companies Inc. disclosed in an 8-K dated November 20, 2018, that it recently purchased a group annuity contract relating to $207 million in pension plan assets. The number of pension plan participants involved was not disclosed.
Several market conditions are prompting plan sponsors to transfer pension risk, as outlined below.
• Corporate pension funding levels are at their highest level since 2007, according to a recent Goldman Sachs report. “Nearly one-quarter of the plans are now either fully funded or over-funded,” according to an October article in The Wall Street Journal. Transferring pension obligations while a plan is well-funded is less expensive for the plan sponsor.
• Employers have been able to take advantage of U.S. tax incentives. If plan sponsors increased their level of contributions to underfunded pension plans by mid-September, plan sponsors were able to secure additional tax breaks for the previous year. PlanSponsor reported that corporate pension contributions increased from $43 billion to $51 billion between 2016 and 2017.
• Higher interest rates enable plans to generate higher investment returns, which then enables plan sponsors to make lower direct contributions to close the gap between being underfunded and fully funded.
• Insurance premiums that a corporate plan sponsor must pay to the Pension Benefit Guaranty Corporation (PBGC) are eliminated for those pension obligations that are funded and transferred to an insurance company. The PBGC per-participant flat premium rate for plan years beginning in 2019 is $80 for single-employer plans (up from $74 in 2018), which translates into substantial savings.
Overall, U.S. corporations transferred $23 billion of defined benefit pension plan risk to insurance companies in 2017. The number is expected to increase slightly to $25 to $30 billion in 2018, according to Mercer, a unit of Marsh & McLennan.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is an experienced pension and 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
Please note that 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.