The insurer said yesterday that it will take over $3.1 billion in pension obligations of Motorola Solutions Pension Plan. This will be done via Motorola’s purchase of a group annuity from Prudential. The deal covers approximately 30,000 of Motorola’s retirees in the U.S.
In addition, Motorola will offer eligible U.S. pension plan participants an opportunity to apply for lump-sum pension payments. These participants number about 32,000.
The combined effect will be to reduce Motorola’s ongoing U.S. pension obligation by $4.2 billion, the companies said in a joint statement.
Reduced obligations are what employers look for in pension risk transfer (PRT) deals. For a variety of reasons, the plan sponsors are increasingly deciding that it would be better for them to stop managing their defined benefit pension plan assets, which are held on company balance sheets. One way to do this is to transfer some or all the assets to a group annuity purchased from an insurance company.
In its Life and Annuity Products Outlook for 2014, Deloitte Consulting predicted a “new group annuities market” could be in the making due to PRT arrangements.
That is what Peggy McDonald is seeing happen. She is a senior vice president and pension risk management actuary for Prudential’s Pension & Structured Solutions business.
“This business has continuously increased during the last two years,” McDonald told InsuranceNewsNet.
A major impetus is the desire to get out of the pension risk business so the employers can focus more on their core business activities, she said. These deals take the obligations off of a firm’s balance sheet and transfer them to insurance companies whose core business is managing pension liability, McDonald said.
It’s not just jumbo employers that are doing PRT deals. Small- and medium-sized employers are doing them, too, she said.
The Prudential/Motorola PRT demonstrates the security of the insurance market, she said, adding she is “extremely confident” in Prudential’s ability to invest the group annuity premium in a manner that is beneficial for the plan participants and that delivers an appropriate return for the shareholders.
“The retirees will continue to collect the same annuity amount they did before,” she pointed out. “The only change is who will handle the payments. That will be Prudential.”
Motorola Solutions chief financial officer Gino Bonanotte struck a similar note. “We have substantially reduced the funding volatility associated with our pension plans while protecting benefits for retirees,” he said in a statement on the deal. “Our retirees’ benefits are not changing, just who provides them.”
Under terms of the agreement, the deal-makers expect to complete the transaction this year, and Prudential will take over administration and the benefit payments in early 2015.
Not a stranger
Prudential is no stranger to pension risk deals of magnitude. In July, it agreed to reinsure the longevity risk associated with a portion of the BT (British Telecom) Pension Scheme. The deal covered over 25 percent of total exposure to longevity improvements, covering roughly £16 billion of scheme liabilities. In 2012, Prudential not only took over approximately $8 billion of Verizon Management Pension Plan obligations covering more than 41,000 retirees; it also took on $25 billion in pension obligations for General Motors, covering 110,000 salaried retirees.
Altogether, Prudential manages the pension benefits of 1.6 million participants at more than 5,700 companies, the company said.
McDonald sees the growth in this market as an evolution of the pension de-risking business. The centerpiece has been the movement of employers away from defined benefit plans and into defined contribution plans like 401(k)s. Many employers have taken steps such as freezing benefits in their pension plans, making contributions beyond the minimum required, and investing to lessen volatility on corporate balance sheets.
Eventually, some companies take the next step. They decide to take the pension liability — and the volatility — completely off the balance sheet. “They don’t want to put more money into the plan, or they don’t want to hold that type of risk.” she said.
For some, the pension plan liability represents a significant percentage of overall market capitalization, and that impacts a business, even smaller businesses.
Several factors have helped move this evolution along. For one, the improved economy has resulted in better funded plans that one or two years ago, McDonald said. That makes the plans more attractive for PRT deals with insurance companies.
In addition, premiums charged to employers by the Pension Benefit Guaranty Corp. (PBGC) keep going up, she said, noting they increased twice in the last two years. The PBGC takes over plans when they fail. Those increases mount up and add to overall cost.
Another factor is longevity risk. Retirees are living longer, she said, with the result that every 10 years, the U.S. mortality table used to value pension obligations has gone up. “It’s about to mark up again over the next few years, by 6 percent to 7 percent,” the actuary said. If these increases exceed expectations, which they typically do, that will impact plan funding.
Finally, McDonald said, plan sponsors are realizing that the nation will continue to be in a low interest rate environment for quite a while. That impacts business operations everywhere, including pensions.
The PRT market
Currently, there are seven to 10 carriers in the PRT market. On jumbo cases, sometimes an employer will split the benefits between two companies, “but I don’t see this as much today” as in years past, McDonald said.
Although group annuities are the vehicle for PRTs, retail annuity advisors do not typically get involved in PRT cases. The transactions must follow very specific regulatory principles, she said. This is not in the typical skill set of many insurance agents and advisors.
But large advisory firms may get involved, she said, citing Morgan Stanley as an example. The firm advised Motorola on the PRT with Prudential, she said.
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