In the past two years, the corporate pension buy-out market has surged with more than $49 billion in transactions, and that trend should continue unabated as large employers try to shift pension debt off their books.
Two pension buy-outs in 2012 General Motors and Verizon accounted for $35.9 billion of that amount.
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 Retirements Pension Risk Transfer team. Executing a successful buy-out requires a significant amount of coordination among several stakeholders, which means its never too early to prepare, whether a buy-out is imminent, a few years away or only a consideration.
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Nearly half of senior financial executives say they are likely to transfer pension plan risk to a third-party insurer within the next two years, according to a 2014 Prudential survey.
There are three types of buy-out transactions: A full buy-out, where the plan is terminated and an annuity is bought for all participants; a partial buy-out with lift-out, where an annuity is purchased only for specific liabilities, typically retirees; or a partial buy-out with spin-off and termination, where the plan is ultimately terminated, Prudential says in a recent white paper, Preparing for Pension Risk Transfer.
Once a plan sponsor decides which type of buy-out suits their needs, they need to follow four steps:
1. Prepare for the buy-out. Get a team together, including outside advisers. Define transaction objectives, organize plan data and identify any constraints.
2. Is it feasible? The plan sponsors initial transaction strategy is provided to insurers to gain feedback on the insurers ability to take on the transaction, assess the availability of capital, evaluate the potential use of an in-kind asset transfer vs. cash and receive indicative pricing, Prudential says.
3. Refine the plan. Now that you know whats out there, you can refine your plan and submit it to your chosen insurer for final pricing on the buy-out type youve chosen.
4. Implementation. The group annuity contract is executed, assets are transferred and data reconciliations occur, according to the white paper.
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Executing a buy-out transaction can significantly reduce or eliminate future pension plan risk for plan sponsors, says Scott Gaul, senior vice president and head of distribution for Prudential Retirements Pension Risk Transfer team. Following a structured process and working with an experienced insurer are keys to shortening the timeline for executing a transaction and accomplishing a smooth pension risk transfer.
Pension buy-outs arent just for large corporations. The number of buy-outs in the small to mid-size plan market has also increased, Prudential found.
When considering a buy-out, plan sponsors should determine how much it would cost to maintain the plan, including the cash cost associated with the plan annually and the impact the plan has on the core business, in terms of cash flow, earnings volatility and the ability to grow, Prudential says.
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Forty-three percent of senior finance executives said that their DB plans placed a constraint on their companys cash flow; 50% said it had an impact on earnings due to volatility of the plans funded status; and 36% said it had an impact on their ability to invest in growth opportunities.
Paula Aven Gladych is a freelance writer based in Denver, Colorado.
