Administration October 19, 2012

Verizon Pension Buyout Benefits Business, Retirees

October 19, 2012 (PLANSPONSOR.com) – The low interest rate environment made it the right time for Verizon to transfer some pension risk, a company spokesman told PLANSPONSOR.
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“The reason we decided to do the pension transfer is because it will increase our long-term financial strength and allow us to better focus on our core business of building and managing communications networks,” he said. “At the same time it ensures that these pension obligations remain in safe and trusted hands.”  

Peggy McDonald, senior vice president and actuary at Prudential Retirement—the company which signed an agreement with Verizon Communications Inc. to transfer approximately $7.5 billion of the Verizon Management Pension Plan obligations to Prudential (see “Verizon Signs Partial Pension Buyout Deal”)—said that is the common desire of the plan sponsors it is working with, “to focus more attention on their core business and less on the business of managing pension risk, while keeping their promise to provide retirement security to plan participants.”  

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McDonald told PLANSPONSOR that Prudential has more pension risk transfers in the pipeline “from a wide variety of plan sponsors—from small to jumbo in terms of size, from many different industries and from both active and frozen plans.” 

As far as the timing of the deal, the Verizon spokesman said the company has been evaluating for a while ways to better understand, manage and predict its long-term pension costs. “Given that the Federal Reserve has indicated interest rates will remain low into 2015, the timing was right to remove some of our risks associated with this volatility,” he stated.  

McDonald believes as plan sponsors become more familiar with these types of transactions, they will understand the economic value of transferring the investment and longevity risk associated with pension liabilities to a company, such as Prudential, for whom management of these risks is a core competency. “We see a trend emerging now that we expect to develop into a robust pension risk transfer market,” she said.  

Prudential signed the nation’s first pension buy-in deal last May with Hickory, North Carolina-based Hickory Springs Manufacturing Company (see “Pru Completes Nation’s First Pension Buy-In”). Since then, a number of companies have announced pension risk transfer moves (see “Another Company Offering Lump Sums to De-Risk Pension”). 

Administration October 19, 2012

Pension Rights Center Wants Halt on De-Risking

October 19, 2012 (PLANSPONSOR.com) – In the wake of moves by several large companies to de-risk their defined benefit (DB) plans, the Pension Rights Center (PRC) is calling for a moratorium on such actions.
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The Center plans to ask Congress to take steps to put a temporary stop to pension buyouts and lump-sum offerings to give policymakers time to examine whether these strategies could result in sellouts of retirement security.   

Verizon has signed a partial pension buyout deal with Prudential (see “Verizon Signs Partial Pension Buyout Deal”), and other companies, including auto giants GM and Ford, are offering lump sums to certain groups of participants (see “PRC Keeping List of Lump Sum Offerings”). The Center said it is concerned about the impact of both approaches on current and future retirees.  

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“These employers are looking to cut costs and reduce long-term liabilities to make their companies more attractive to investors, but ‘de-risking’ can be risky for workers and retirees,” said Karen Friedman, the Center’s executive vice president and policy director. “Insurance company annuities backed by State Guaranty Associations could leave retirees with less protection than the pensions provided by their companies backed by the insurance provided by the Pension Benefit Guaranty Corporation. Also, lump sums place the burden on individuals to ensure that the money lasts throughout retirement. We need to stop, take a breath, and make sure that the retirement security of the people affected by these moves is fully protected.”  

Friedman added: “How secure are the annuities that are being purchased in plan terminations? What is the exposure of the insurance companies that are taking on these large group annuity contracts? Do people understand the consequences of taking a lump sum? These are the types of questions that we want to make sure are addressed.”

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