By Cyril Tuohy
The announcement last week that Kimberly-Clark had reduced by $2.5 billion its pension fund liabilities through a transaction with Prudential and MassMutual is unusual although not unheard of in the pension transfer world, according to a pension expert.
Sean Brennan, lead buyout strategies for the benefits consulting firm Mercer, said the advantage of splitting Kimberly-Clark’s pension liabilities among two insurers means the paper products company can enhance the state guarantee protections for individual plan participants.
“In addition, if you have a deal of this size in particular, there are insurers who drop out of that space and are unwilling to go up to, for example, above $1 billion to price on that liability,” Brennan said last week in a webinar following Kimberly-Clark’s Feb. 23 announcement.
“So to that extent that you can split that liability in two, you can keep the market a bit more competitive and provide yourself more options from a security standpoint,” he said.
Under terms of the deal, the pension payments the company owes to its 21,000 retirees in the U.S. will be split evenly among the two insurers and paid for through group annuity contracts. Payments to the retirees under the new structure begin June 1, the company said.
While Prudential will be the annuity administrator for the benefit payments, each retiree's benefit will be split evenly between Prudential and MassMutual, enhancing the security of the retirees' benefits, the company also said.
Kimberly-Clark, which manufactures products sold under brands that include - Kleenex, Scott and Huggies - said it would make a payment contribution of up to $475 million to its U.S. pension plan to fund its pension transaction.
Brennan said multi-insurer transactions are more common in Canada than they are in the U.S.
The multi-insurer model is the least used among the three models insurance carriers use to structure pension risk transfers, Mercer experts said. The two other models are the general account and the separate model.
For years, carriers relied on the general account model and more than 90 percent of pension transfer deals were executed using the general account model where the annuity is backed by the insurer’s general account.
Brennan said that more recently insurers have moved away from the general account model in favor of the separate account model.
With larger pension buyout deals especially, in a separate account model the annuity is backed by a pool of assets dedicated to obligations in the separate account. Separate account models are becoming more common among pension deals under $1 billion, Brennan added.
The drawback of the separate account model is that not all insures in the pension risk transfer market offer separate accounts, which means “the pool of insurers available to provide that has dwindled from the total universe,” Brennan said.
The Mercer experts said annuity buyouts span all industries and credit qualities for pension size of varying degrees. This indicates that many pension plans are interested in executing an annuity buyout.
Kimberly-Clark’s pension deal followed two big pension liabilities settled last year by Motorola and Bristol-Meyers Squibb, which in-turn followed huge risk transfer deals involving General Motors and Verizon in 2012.
Each of the deals involved annuity purchases in the partial transfer of the companies’ pension liabilities.
The GM deal, by far the largest of the five, involved 118,000 participants and a $26 billion liability settled through a combination of lump sums and an annuity purchase.
More plan sponsors will be attracted to consider annuity buyouts in 2015 due to the drop in relative pricing of buyouts in the U.S. market since 2011, Brennan said.
In December, the ratio of the average buyout price to the balance sheet obligation of a sample retiree plan dropped from 9 percent on Nov. 30 to 5.3 percent on Dec. 31, according to the Mercer U.S. Pension Buyout Index.
The reason for the drop in relative pricing was due to the adoption of more conservative mortality tables by plan sponsors. As a result, companies have an opportunity to settle pension liabilities at more attractive prices while maintaining a desired level of security for plan participants, according to Mercer statistics.
“We do think this drop in relative pricing will drive more plan sponsors to execute annuity buyouts or at least be attracted to and strongly consider executing annuity buyouts in the coming months and years,” Brennan said.
Matt McDaniel, leader of Mercer's defined benefit practice in the U.S., said that annuity buyout activity in 2014 came to an estimated $8.4 billion, more than double the level in 2013.
Last year, more than half the $8.3 billion in pension buyout transaction volume was related to retiree buyouts for an ongoing retirement plan not scheduled for termination. In previous years, most of the annuity buyout activity related to plan terminations, McDaniel said.
“That’s a trend we do see intensifying and that we expect to continue in 2015,” he added.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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