The cost of a retiree pension buy-out has been widely reported to represent a roughly 10% premium over the corresponding GAAP accounting liability. As plan sponsors update their mortality basis from the current standard (RP-2000 base table plus Scale AA improvement) to more updated tables recently issued by the Society of Actuaries (RP-2014 tables with MP-2014 improvements) this 10% premium will decrease significantly. This is because the issuance of new mortality tables for plan sponsors, which increases accounting liability significantly, does not impact an insurer’s perspective on mortality when pricing a buy-out. As plan sponsors move to a more economic view of their pension liabilities by reflecting the updated expectation of longevity, accounting liability and buy-out pricing will become better aligned.
It is expected that plan sponsors will adopt the new mortality standards over the next few years. It is likely that some sponsors will adopt the new tables before or at the same time they settle retiree liabilities via a buy-out and others will not, creating confusion for market participants, investors and analysts as they attempt to understand the economics of buy-out transactions. This is why it is simply not appropriate to compare transactions by comparing price to a sponsor’s calculation of accounting liability. To recap:
• Recognition of the new mortality tables will result in significant increases to accounting liabilities, with the average plan sponsor seeing an increase of approximately 7% for their overall plan, and 8% for the retiree liability.
• Additionally, some sponsors of plans that cover salaried employees may choose to use ‘white collar’ versions of these tables that increase liabilities yet another 3%-4% for an average retiree population.
For a more detailed discussion of the cost of buy-out relative to GAAP accounting liabilities before and after the adoption of new mortality tables, please refer to Myth 4 in Prudential’s recent white paper “Reducing Pension Risk: The Five Myths Holding Back Plan Sponsors.”
Bristol-Myers Squibb Company has partnered with The Prudential Insurance Company of America to complete a major pension risk transfer transaction. Under the terms of this strategic agreement, Bristol-Myers Squibb will settle $1.4 billion in pension obligations through the purchase of a group annuity contract, and Prudential will administer and pay future benefits for Bristol-Myers Squibb’s approximately 8,000 current U.S. retirees and their beneficiaries who started receiving monthly retirement benefits on or before June 1, 2014. The arrangement maintains the retirement security of Bristol-Myers Squibb employees and their beneficiaries while diminishing risk in Bristol-Myers Squibb’s U.S. Retirement Plan. Read more here.
Motorola Solutions, Inc. has reached an agreement with The Prudential Insurance Company of America under which Prudential will assume responsibility for retirees’ monthly pension benefits in what will be the third-largest pension buy-out in the U.S. to date. The Motorola Solutions Pension Plan intends to purchase a group annuity contract from Prudential under which Prudential will pay and administer future benefits to the approximately 30,000 retirees who currently receive payments. The transaction is expected to be completed in 2014, with Prudential assuming responsibility for making the benefit payments beginning in early 2015. More information here.
Over the last decade, market volatility has reshaped the defined benefit (DB) pension plan landscape. Many corporations hold a disproportionate amount of risk in their pension plan, and are re-thinking how best to align those risks toward the core business.
Companies are pursuing strategies to address rising funded status – but there is no “one size fits all” approach.
Chief financial officers, treasurers, boards of directors, chief investment officers and trusted advisors have been shifting priorities from maximizing returns to pension de-risking. In fact, 48% of CFOs have already implemented or are planning to implement a pension risk transfer through buy-in or buy-out strategies.
Prudential’s approach to Pension Risk Transfer is fundamentally different. We don’t see PRT as a product. Prudential can help architect the unique combination of solutions and timing to protect and deliver promised benefits within the context of fiduciary and regulatory requirements and your core business.
Since 1928, Prudential has helped over 5,700 pension risk transfer clients provide and protect retirement security for more than 1.6 million people.
Prudential is proud and honored to be the largest provider of pension risk solutions in the United States. From the Cleveland Public Library pension risk transfer agreement in 1928 to the groundbreaking $25 billion General Motors Retirement Program for Salaried Employees transaction in 2012, each client is unique and intrinsically important.
De-risking can seem like a complex process, and our team of dedicated PRT experts is here to work alongside you as we design and execute a strategy to meet your particular challenges and strategic goals.
"Pension risk transfer transactions exemplify our capabilities, culture of multi-disciplinary collaboration, and financial strength. It’s not only about pricing. It’s about the confidence a client has in a high-quality close and execution, and doing it on a timely basis. We have very good marks for this in the industry. I doubt that any other insurer has started as early or invested as heavily as we have in this area. . . it involves risks that we know and manage well."
John R. Strangfeld, Chairman and Chief Executive Officer