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Insurance Companies Turning Unfunded Corporate Pension Liabilities To Assets

 June 11, 2012 03:51 PM

(By Rich Beiglmeier) Reuters is out with an interesting story regarding what's known as pension terminal funding. Essentially, companies pay an upfront premium, approximately 110% of liabilities, to an insurance company for an annuity that covers all pension members' benefits.
iStock sees this as a potential, near-term windfall for capable insurance companies, and a smart way for companies loaded down with retiree costs to free themselves of the long-term financial headaches that they cause.
Just last week, General Motors (GM) transferred $26 billion of its retirement obligations to Prudential Financial, Inc. (PRU). We think these transactions are a win/win scenarios for the company, pensioners, insurance companies, and ultimately investors.
Morgan Stanley says, "Pension risk increases stock price volatility, firm beta, and cost of capital. Investors view pension liabilities as riskier than debt."
While companies could suffer large upfront costs to fund the annuity, long-term iStock sees the move as beneficial for earnings and worker relations. Getting unfunded retirement costs off the books could result in major savings for years to come.
On the insurer's side, GM may be the butterfly flapping its wings that started a hurricane of retirement savings changes. In the Reuters article, Prudential's senior vice president of the company's pension risk transfer business, Dylan Tyson says "We're seeing more activity in this market now than we've seen in the last three to five years combined."
How much potential activity could there be, Reuters analysis reveals "94 percent of the biggest corporate pension plans in the U.S. are underfunded.  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." Additionally, further research showed that nearly 150 companies have the necessary cash to benefit from a pension transfer.
The sooner they get started, the better.
The long-term price tag is only going to grow as retirees live longer, and longer and longer. Additionally, life expectancy doesn't account for crazy stock market swings. An internal Prudential study finds that "twice in the last 10 years, U.S. sponsors of defined benefit plans have lost over 35% [of] funded status in stock market downturns." Wow, that hurts.
Dramatic losses actually results in pension managers taking more, not less risk. That's because as assets fall, liabilities continue to rise. It's a toxic combination that's likely to make pension terminal funding more attractive to underwater plan administrators than managing the risk themselves.
Transferring is popular in England, and if GM caused the practice to cross the Atlantic then companies like Prudential Financial, Inc. (PRU), MetLife, Inc. (MET), American International Group, Inc. (AIG), Cigna Corp. (CI), The Hartford Financial Services Group, Inc. (HIG), Principal Financial Group Inc. (PFG) and others could see their sagging stock prices transfer to higher levels, too.


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