Pension buyouts expected to surge — but not yet
As interest rates rise, environment for selling off liabilities will
improve
Published: October 14, 2013 - Pensions & Investments
Pension buyouts have been in a lull so far in 2013, but insurers and
consultants expect a rush by corporate defined benefit plans in the next several
years.
That's because expectations of rising interest rates plus improved funding
ratios for many plans will make it easier and less expensive to sell their
liabilities to insurers, sources said.
Executives at annuity providers like Newark, N.J.-based Prudential Financial
Inc. and Metropolitan Life Insurance Co., New York, expect a total of $2 billion
to $5 billion in buyouts by the end of 2013. Year to date there's been about $1
billion in activity, but corporate plans historically ramp up their decisions on
pension buyouts in the last quarter.
Glenn O'Brien, managing director and head of U.S. distribution and client
management for pension risk transfer at Prudential in New York, said he expects
about $2 billion in pension buyouts in 2014, possibly reaching $3 billion. hWe
think $150 billion in five years could get done.h
Ed Root, vice president of U.S. pensions at MetLife, said several gsuper
jumboh pension plans could be in a position to do an annuity transaction in
2014, but he wouldn't name the plans. He also expects an average of $20 billion
in pension buyout deals annually over the next 10 years.
So far this year, buyout activity has been average compared with the last 10
years, but far below the heady days of 2012, when high-profile pension buyouts
at General Motors Co. and Verizon Communications Inc. propelled the liability
annuitization market to about $37 billion for the year.
gThe market won't rebound to $37 billion this year,h said Richard McEvoy,
partner and leader of Mercer LLC's U.S. financial strategy group, New York. gThe
market hasn't taken off, and (current) interest rates have a lot to do with
this, but sponsors take a while to get their act together. They're talking about
it.h
gWe knew, especially after Verizon and everything else, that 2013 was going
to be a disappointing year,h Mr. O'Brien said. gBut (executives at large plans)
know they can get it done, depending on their funded status.h
Said Donald Stegall, financial adviser in the Paramus, N.J.-based Napolitano
Group at Morgan Stanley: gOnce the dam breaks, there's going to be a huge flood
of pension buyouts.h
At or near 100% funding
Sources also said many frozen DB plans that are at or near 100% funded will
be in a position to offload their liabilities. They wouldn't identify any plans,
but according to data from Pensions & Investments, the following
companies with frozen DB plans and funded status at or above 100% could be in a
position to do so (all data are as of Dec. 31):
- Prudential, whose $12.69 billion plan was 105.3% funded;
- Bank of New York Mellon Corp., New York, at $4.278 billion, 104.5% funded;
- Target Corp., Minneapolis, $3.223 billion, 101.9% funded; and
- J.C. Penney Co. Inc., Plano, Texas, $5.035 billion, 99.9% funded.
Pension executives at Prudential, BNY Mellon, Target and J.C. Penney did not
return calls for comment. Several sources said plan executives, particularly
those at publicly traded companies, are reluctant to say whether they're
considering pension buyouts because of the regulatory requirements for
disclosures to the Securities and Exchange Commission, Internal Revenue Service
and Department of Labor.
Prudential's Mr. O'Brien said the insurance giant's DB plan has 75% of its
assets in a liability-driven investment strategy. The plan is purposely
overfunded so excess pension assets can be transferred to the company's health
benefits account under IRS Code Section 420. gWe could annuitize, but not at
this moment,h he said.
One pension executive overseeing a frozen DB plan thinks the time isn't
right. gIt's early in the lifecycle,h said Brian Szames, treasurer at
Cincinnati-based Macy's Inc., which has a $3.387 billion frozen plan. gI've read
about GM and Verizon. It's very interesting, but we feel it's too early.h
Mr. Szames wouldn't say whether there'd be interest in a buyout in the future
or elaborate on when the timing might be right to do a buyout. The Macy's plan
was 95.3% funded as of Dec. 31, according to P&I data. He said
funding has improved since then but wouldn't provide statistics.
Still, it's ga fair assumptionh that large, fully funded, frozen DB plans are
prime candidates for buyouts, said Janis Kane, director, asset allocation
research, at Rocaton Investment Advisors LLC, Norwalk, Conn. gThe more
well-funded pension plans using (liability-driven investing) would at least
consider it.h
For open and active pension plans, buyouts are discussed more in passing,
added Robin Pellish, Rocaton CEO and co-founder, but gthe more serious
discussion is with those frozen or closed plans that are close to full funding,
though not all are looking to transfer their liabilities,h looking instead to
other derisking strategies.
'Significant year for derisking'
g2014 will be a significant year for derisking,h said Matt Herrmann, St.
Louis-based senior consultant and leader of the retirement risk management group
at Towers Watson & Co.
And pension executives, though currently taking a wait-and-see attitude on
when buyouts will be affordable, are talking about it with consultants and
insurers, gWe've had a lot of conversations with pension plans, basically about
if not now, when should we do this,h he said. g(Low) funded status was a fairly
significant deterrent when the median (funding ratio) was 75%, but we're seeing
a shift back again as the equity market has improved and funding ratios have
grown to 85% to 95%.h
For pension plans with more than $1 billion in assets, it might not make
sense to do a buyout now because settlement accounting is a problem cost-wise.
gBig plans can wait to get to 100%, 110% funding when it will be less expensive
to do a buyout,h Napolitano Group's Mr. Stegall said.
Ari Jacobs, senior partner and global retirement solutions leader at Aon
Hewitt, also in Norwalk, said pension buyouts take 12 to 24 months gfrom soup to
nuts.h That includes regulatory requirements, necessary changes in asset
allocation and communicating the changes to participants.
Pension executives first have to determine how to derisk — through buyouts,
pension buy-ins, LDI or lump sums — or some combination.
gFrom an economic standpoint, lump sums are generally more cost-efficienth
than pension buyouts, said Rocaton's Ms. Kane. gIt's usually a natural
progression from lump sums to buyouts.h
Original Story Link: http://www.pionline.com/article/20131014/printsub/310149973
Copyright © 2013 Crain
Communications Inc. All Rights Reserved.