Washington: Verizon has done it. General Motors has done it. And so have Ford and, recently, ketchup kingpin Heinz.
These brand-name companies have all moved part of their pension obligations off their books and into annuities run by insurance companies.
The move, called de-risking, requires companies to pay a lump sum to purchase a group annuity from an insurance company. The insurer then takes over the retirement payments, wiping troubling and erratic pension obligations off the books of the purchaser.
For retirees, the move should make no difference: Their cheques come as always, assuming the insurance company that sells the annuity remains in fine financial shape.
But for the companies buying the annuities, the change offers an opportunity to shed volatile risk. That prospect has grown more appealing to companies in recent years as low interest rates and a volatile stock market have caused companies to pour billions into their pension funds to keep pace with accounting rules.
Now that the stock market is roaring and interest rates are expected to increase, buying annuities to get rid of pension obligations is becoming less expensive. That means interest in de-risking is rising. A recent survey of 182 companies by Prudential found that 53 per cent of them have either transferred defined benefit pension liabilities to a third-party insurer or “are likely to” in the next two years. That is a sharp increase from a 2010 survey.
“From a company’s point of view there is longevity risk,” as people live longer, said Scott Gaul, a senior vice president for Prudential, which has done tens of billions dollars in pension risk transfers in recent years. Also, “pensions are a very volatile liability on their balance sheet,” he said. “It has been a distraction for corporations, but from Prudential’s point of view, it really is our core business.”
Retirement security
With many traditional company pension plans frozen — meaning employees are accruing no new benefits and plans are accepting no new members — some advocacy groups worry that “de-risking” will end up being yet another blow to retirement security.
The Pension Rights Centre, which pushes for better retirement security, worries that converting pensions to insurance annuities could open retirees up to new problems. Often, when a company transfers a pension to an annuity it also offers retirees the option of a lump-sum buyout, a move that is cheaper for companies than buying an annuity.
Those buyouts are often attractive to retirees who can get their hands on as much as hundreds of thousands of dollars at once, but few are prepared to invest the money in a way that will make it last a lifetime. Advocates also worry that annuities are not backed by a federal agency such as the Pension Benefits Guaranty Corp, which insures private pensions. In comparison, annuities are backed by state associations.
But the outgoing head of the PBGC sees no problems with de-risking into an annuity. He said because companies have chosen to shed their pensions, the choice retirees face is not between a regular pension and an annuity, but an annuity and a lump sum of cash that has to last them through retirement.
“From our perspective, the bigger worry is how de-risking is done,” said Joshua Gotbaum, director of the PBGC. “De-risking by transferring obligations to a reputable insurance company is infinitely better than offering employees a pot of money.”
