BOSTON/NEW YORK | Mon., Jun 11, 2012 7:18am EDT (Reuters) — Last week's deal by Prudential Financial to take on $26 billion of the retirement liabilities of General Motors has reignited a flagging part of the American insurance market.

Although experts say GM's splash was so big, there may be somewhat limited capacity for more mega-sized deals in the market for pension-risk transfers. Still, the market could be in the tens of billions over the next few years, they said.

A Reuters analysis of the pension obligations of the S&P 500 found that almost half of the companies with underfunded pensions have enough cash to spare to do a risk-transfer deal, including Rupert Murdoch's News Corp and agriculture giant Archer Daniels Midland Co., suggesting there could be a scramble ahead for that limited capacity.

Known as pension terminal funding, the concept is simple: an employer pays an upfront premium to an insurance company for an annuity that covers all the members of a pension plan. The insurer becomes responsible, via the annuity, for all of the retirees' pensions and the sponsor gets to wash its hands of the obligation.

For years, plan sponsors have held off on buying single-premium group annuities to transfer risk, hoping that interest rates would rise from historically low levels, boosting the value of their assets and potentially filling pension gaps without extra cash.

But with rates showing no signs of rising — and even declining further because of the euro zone crisis — the need to get the plans off corporate balance sheets has come to the fore.

Up to now, the pension annuity market had been much more active in the UK, with estimates of just $3 billion in total transfer deals in the United States in the last three years, perhaps one-fifth the size of the British market.

"With the GM transaction, in one fell swoop the [U.S.] pension de-risking market has caught up with where the UK is," said Dylan Tyson, the Prudential senior vice president who runs the company's pension risk transfer business. "We're seeing more activity in this market now than we've seen in the last three to five years combined."

Some 94% of the biggest corporate pension plans in the U.S. are underfunded, according to the Reuters analysis. At the close of their 2011 financial years, 322 of 343 S&P companies that report their pension status indicated their plans didn't have enough assets to meet future pension obligations, to the tune of $363 billion.

The best candidates for future termination deals would be plans closer to full funding that are run by companies with cash available to cover the premiums, said Stephen Brown, senior director at credit agency Fitch Ratings. The Reuters analysis looked for companies with at least twice the cash needed to do a deal similar to GM's. The analysis turned up 150 companies with the flexibility to potentially conduct a pension transfer.

"Almost any company could do what GM did," said John Ehrhardt, principal at actuarial consulting firm Milliman in New York, who reviewed Reuters' analysis. But because interest rates are at historic lows, pension liabilities are at historic highs, making a potential deal more costly. "That's the balance the CFO has to make: even if you have the cash on hand, is it worth the hit to de-risk your portfolio?" he said.

KLA, News Corp, Oracle and ADM declined to comment, and EQT did not respond to request for comment.

(Additional reporting by Cezary Podkul in New York; Editing by Steve Orlofsky)

© 2011 Thomson Reuters. Click for Restrictions.

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