Annuities Gain Traction In DB Retirement Plans

By Cyril Tuohy
InsuranceNewsNet

More than one-fifth of companies that sponsor a defined benefit (DB) retirement plan say they are considering buying annuities to fund a portion of their obligations to the plan participants. That’s according to a survey by the global retirement and health benefits consulting company Aon Hewitt.  

The survey also found that 22 percent of companies are “very likely” to offer “terminated vested participants” a lump sum window this year. In addition, 19 percent of employers said they plan to increase their cash contributions to the retirement plan to reduce Pension Benefits Guaranty Corp. (PBGC) premiums in the year ahead.

Ari Jacobs, global retirement solutions leader at Aon Hewitt, said in a news release that companies anticipate higher pension plan costs “due to recent changes to the Society of Actuaries longevity models and rising PBGC premiums.”

“Settlement strategies may be an appropriate approach for well-funded DB plans so that pension plan sponsors are able to honor the retirement benefits promised to participants, while also considering the long-term financial outlook of the plan," he said.

In the latest example of a corporation transferring pension liabilities through the purchase of annuities, Kimberly-Clark Corp. - the multinational manufacturer of brands that include Kleenex, Scott tissues and Huggies diapers - said Monday that it had entered into a deal with Prudential and MassMutual to transfer about $2.5 billion in pension liabilities.

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.

Kimberly-Clark chief financial officer Mark Buthman said in a statement that the group annuity contracts from the two insurers “provide excellent benefit security for our retirees, while further reducing noncore financial risk for Kimberly-Clark.”

The company also said it would make a payment contribution of up to $475 million to its U.S. pension plan to fund the transaction.

Shifting pension obligations onto insurers is an example of the company adjusting its retirement plan assets to better match its liabilities. By transferring its pension obligations, Kimberly-Clark removes a long-term liability from its balance sheet.

The survey of the 183 defined benefit plan sponsors found that 36 percent of companies were adjusting retirement plan assets to better match retirement plan liabilities.

“Pension plan sponsors are planning ahead and are taking actions now to better position themselves to manage volatility in their pension plans no matter what the future economic environment brings,” said Rob Austin, director of retirement research at Aon Hewitt.

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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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].