Preparing plan sponsors for future transactions
NEWARK, N.J., June 5, 2015 – The surge in high profile pension buy-out transactions in recent years may prompt employers to consider pension risk transfer as a solution for de-risking their plans, and prepare for future transactions, according to a new white paper from Prudential Retirement, “Preparing for Pension Risk Transfer.”
Prudential Retirement is a business unit of Prudential Financial, Inc. (NYSE:PRU).
Since 2012, the U.S. market has seen buy-out transactions totaling over $49 billion, including General Motors, Verizon, Motorola, and Bristol-Myers Squibb, all completed by Prudential, as well as an innovative transaction in which Kimberly-Clark Corporation reduced their pension liabilities by $2.5 billion and evenly split financial responsibility between Prudential and another insurer.
According to a 2014 Prudential survey, 48 percent of senior financial executives indicated that they are likely to transfer pension plan risk to a third-party insurer within the next two years.
“Corporate sponsors are realizing that now is an ideal time to execute a pension buy-out, given the continued funded status volatility, new mortality assumptions that will increase DB plan liabilities, and increasing PBGC premiums,” says Peggy McDonald, senior vice president and actuary on Prudential Retirement’s Pension Risk Transfer team. “Executing a successful buy-out requires a significant amount of coordination among several stakeholders, which means it’s never too early to prepare, whether a buy-out is imminent, a few years away or only a consideration.”
Three Basic Types of Buy-Outs
According to the white paper, there are three basic types of buy-out transactions plan sponsors can consider, including a full buy-out (plan is terminated; annuity purchased for all participants), partial buy-out with lift-out (annuity purchased only for specified liabilities, typically retirees), and a partial buy-out with spin-off and termination (plan is ultimately terminated).
Once plan sponsors decide what type of buy-out they want to pursue, they can begin the process of transacting which is outlined in four phases, according to the white paper:
Internal team is identified, which will be responsible for the pension risk transfer process, selecting any outside advisors, defining transaction objectives, organizing plan data and identifying any constraints.
Plan sponsor’s initial transaction strategy and data set is provided to insurers as part of an RFI process in order to gain feedback on insurer’s ability to take on the transaction, assess the availability of insurers’ capital, evaluate the potential use of an in-kind asset transfer versus cash and receive indicative pricing.
- Structure and Refinement
Plan sponsor is given time to assess results from the feasibility phase, refine transaction specifics, refine the data set for submission to insurers for formal pricing and finally select an insurer from which to purchase the buy-out and select what type of buy-out transaction to pursue.
Final stage of the process where the group annuity contract is executed, assets are transferred and data reconciliations occur.
Executing a buy-out transaction can significantly reduce or eliminate future pension plan risk for plan sponsors,” explains Scott Gaul, senior vice president and head of distribution for Prudential Retirement’s Pension Risk Transfer team. “Following a structured process and working with an experienced insurer are key to shortening the timeline for executing a transaction and accomplishing a smooth pension risk transfer.”
Prudential’s Traditional Buy-out is a group annuity contract issued by The Prudential Insurance Company of America (PICA), Newark, NJ 07102. Amounts contributed are deposited in PICA’s general account. Any payment obligations or guarantees are contingent on the claims-paying ability of PICA. Prudential’s Portfolio Protected Buy-out and Prudential’s Portfolio Protected Buy-in are group annuity contracts issued by The Prudential Insurance Company of America (PICA), Newark, NJ 07102. Amounts contributed to the contracts are deposited in a separate account established by PICA. Payment obligations specified in the group annuity contracts are insurance claims supported by the assets in the separate account and, if such assets are not sufficient, by the full faith and credit of PICA.
Prudential Financial, The Prudential Insurance Company of America, and Prudential Retirement Insurance and Annuity Company are each solely responsible for their own contractual and financial obligations. All guarantees are subject to the claims-paying ability of the issuing insurer. Products not available in all states. Prudential Retirement delivers retirement plan solutions for public, private, and nonprofit organizations. Services include defined contribution, defined benefit and non-qualified deferred compensation record keeping, administrative services, investment management, comprehensive employee education and communications, and trustee services, as well as a variety of products and strategies, including institutional investment and income products, pension risk transfer solutions and structured settlement services. With over 85 years of retirement experience, Prudential Retirement helps meet the needs of 4.0 million participants and annuitants.
Prudential Retirement has $365.3 billion in retirement account values as of March 31, 2015. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates. Prudential Financial, Inc. (NYSE:PRU), a financial services leader with more than $1 trillion of assets under management as of March 31, 2015, has operations in the United States, Asia, Europe, and Latin America. Prudential’s diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential’s iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit www.news.prudential.com