U.S. insurers are buying corporate pension plans at a record clip as rising interest rates and all-time high stock-market values give companies the perfect excuse to offload them.
“The movement is expected over time to transform the management of pensions for employers, which can slash their exposure to the volatility of the stock and bond markets, as well as for the insurance industry, which gains a source of growth at a time when some traditional businesses are slipping,” The Wall Street Journal reported.
These deals have been around for at least 90 years, but they can be limited by a Catch 22: in good times, corporate leaders feel less of a need to rid their companies of pension burdens, and in bad times it is more expensive to do so, Reuters recently reported.
Calculating they can make more money from selling companies an annuity to cover the cost of the pension plans and then invest the proceeds in bonds and other securities, insurers are competing to persuade corporate America to sell them their pension risk.
"There's a huge opportunity for the insurance industry," Ellen Kleinstuber, who advises pension-plan sponsors as an actuary for CBIZ Inc., told Reuters.
Prudential Financial Inc, the biggest player in pension transfers, recently said it had finalized $2.2 billion in pension deals during the fourth quarter, including a $1.8 billion deal with United Technologies Corp.
Other large insurers, including MetLife Inc and Principal Financial Group Inc are also competing for hefty pension deals as smaller insurers jockey for a slice of the market.
With so much competition, many pension consultants expect 2017 to be a strong year for pension deals. Pension transfers totaling $8.1 billion were finalized in the first nine months of 2016, according to LIMRA, an industry trade group. The number of deals hit 225, the highest in more than 25 years.
"It's really unstoppable now," Scott McDermott, a managing director at Goldman Sachs Asset Management who advises companies on pension issues, told Reuters.
Pension transfers have been kicking around the insurance industry since the Cleveland Public Library unloaded its pension to Prudential in 1928. Prudential is still making payments to two of those employees, ages 100 and 103, a spokesman said.
The biggest driver of the trend in recent years is the growing number of companies that are deciding to end their plans, McDermott said.
As retirees live longer and the legal and financial cost of maintaining pensions rise, corporations are keen to jettison them.
The problem for companies looking to offload is that the pension plans must be fully-funded before they can sell them. GM, for example, had to inject more than $2.8 billion into its pension before closing a 2012 transfer to Prudential. It also paid Prudential a $2.1 billion fee for taking on the assets.
GM's current U.S. pension plan that is still held by the company is underfunded by $7.2 billion.
Surging stock markets and rising interest rates are making it easier for companies to replenish their pension plans but there are still gaps. The average corporate pension fund was 82 percent underfunded as of Jan. 31, according to Mercer Investment Consulting.
While retirees may be stunned to learn an old employer no longer is responsible for their pension, others may consider their benefits even safer in the hands of a highly rated insurer with expertise in longevity calculations, the Journal explained.
"Now the prospect of higher U.S. interest rates is providing another spur to the little-known business of transferring pension risk. Under the complex math used to calculate liabilities, higher rates generally make it less expensive for employers to offload pension obligations," the Journal explained.
“If interest rates go up…there definitely will be a lot [of employers] lining up to do this,” Robin Diamonte, chief investment officer of United Technologies Corp., told the Journal. The Connecticut manufacturer signed a $775 million deal in October to transfer about 35,000 pension-plan participants to the care of Prudential Financial Inc.
(Newsmax wire services and Reuters contributed to this report).
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