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The annualization of pensions continues in a trend of risk reduction

A consumer products company announced that, as of June 1, retirement pension benefits owed to approximately 21,000 of its retirees will now come from two US insurers. The company’s profit obligation was approximately $ 7 billion, while plan assets stood at around $ 6 billion in 2014.

Although the first insurance company will be the sole annuity administrator for benefit payments, each retiree’s benefit will be divided evenly between the two as a security reinforcement measure. An independent trustee represented the interests of the retirees and determined that a split transaction was the safest annuity structure available.

The annuity purchase will be financed with assets from the product company’s US pension plan. To support the transfer, the company expects to make a contribution of $ 400 to $ 475 million financed by debt financing, incremental to the company’s previous assumption for 2015 global defined benefit pension plan contributions of up to $ 100 million. .

A Texas-based personal care corporation expects a noncash pension settlement charge of $ 800 million in the second quarter of this year, but that will be excluded from the company’s 2015 adjusted results. The company expects that this transaction is likely to save the firm about $ 2.5 billion without changing the monthly benefit of retirees or hurting the financial prospects of the company.


The leading consumer products company follows in the footsteps of other companies that have changed their pension plan obligations in light of rising insurance premiums and longer life. A recent Aon Hewitt survey of 183 defined benefit plan sponsors indicated that up to two-thirds of respondents intend to take more steps in 2015 to control Pension Benefit Guaranty Corporation (PBGC) premium costs in the future, and most likely choose settlement strategies to do so.

Based on responses from defined benefit pension plan sponsors in the survey, it was revealed:

• It is highly likely that almost a quarter (22 percent) of employers will offer terminated vested participants a lump sum window in 2015

• 19 percent plan to increase cash contributions to reduce PBGC premiums in the next year

• 21 percent are considering purchasing annuities for a portion of their plan participants.

Additionally, the Aon Hewitt survey also found that plan sponsors are increasingly adjusting plan assets to better balance liabilities:

• More than a third (36 percent) have made this change recently

• It is very likely that 31 percent of the remaining group will do so in the next year

Other survey results are revealing in terms of where companies currently stand with their pension plans:

• 74 percent have a defined benefit plan

• 35 percent have an open and continuous pension plan.

• 34 percent have a plan that is closed to new hires.

• 31 percent have a frozen plan

• 45 percent recently completed an asset-liability study.

• 25 percent are somewhat or very likely to do a liability study in 2015 (of those who have not yet done so)

• 18 percent conducted a mortality study in 2014; 10 percent plan to do so in 2015

• Currently, 26 percent monitor their plan’s funding status on a daily basis, compared to just 12 percent in 2013


Employers who plan ahead to better manage the potential volatility of their pension plans, whether through the purchase and transfer of annuities or through lump sum payment offers, will be better positioned in the future. However, de-risking should not only balance business results, but also protect retired assets.

In 2013, the Department of Labor’s ERISA Advisory Council issued a report confirming recent increases in de-risk activity from defined benefit plans. The Board addressed the need to view these transactions as more of a ‘transfer of risk’ because when the sponsor of the pension plan eliminates its risk, the transaction results in a corresponding increase in risk to the other party, be it the insurer in the case of an annuity. purchase or on the individual participant in a lump sum payment offer.

The Council recommended that the Department of Labor:

1.) Clarify the scope of IB 95-1 to include that risk elimination activity applies to any purchase of an annuity from an insurer as a profit sharing under a defined benefit plan, not just purchases coinciding with termination of the plan. Also consider the development of safe ports within the scope of the Interpretive Bulletin for such purchases.

2.) Require that a defined benefit pension plan provide participants with the option of a lump sum distribution within a specified window, with or without a separate option from the annuity distribution described in IB 95-1.

3.) Consider providing guidance under ERISA Section 502 (a) (9) to provide clarity to plan fiduciaries regarding the consequences of a breach of fiduciary duty in selecting an annuity contract for distribution outside of the plan, including guidance for the term “appropriate compensation” (for example, whether monetary compensation is available) and under what circumstances “collateral allocation” may be necessary.

4.) Provide education and outreach to plan sponsors.

5.) Consider the potential benefits of gathering relevant information regarding plan risk elimination in the form of lump sum windows and annuity purchases outside the context of plan termination.


As ERISA-Benefits Consulting has reported in the past, pension transfer arrangements are likely to continue as plan sponsors look for ways to take employee benefit costs and associated liabilities off their books.

However, the trend of pension annualization is a concern for some retirees because their benefits are no longer backed by PBGC pension guarantees. If Prudential, Mass Mutual, or another insurance company runs into financial challenges, payment shortfalls would be managed through state-required guarantee funds that are funded by the insurance industry.

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