Massachusetts Mutual Life Insurance Company will take on the pension liabilities from AK Steel Holding Corp. for 4,250 retirees on March 1, 2020. This pension risk transfer allows West Chester, Ohio based AK Steel to transfer $615 Million in pension liabilities and marks its second pension de-risking transaction with Massachusetts Mutual. In 2018, AK Steel transferred approximately $280 Million in pension liabilities effecting 5,400 retirees. On Wednesday, November 21, 2109, the company announced: “We are pleased to have completed another annuity transaction, which brings the total pension obligations we have transferred to highly-rated annuity providers to about $1.1 billion over the past three years,” said Roger K. Newport, Chief Executive Officer of AK Steel. “This is another important step in de-risking our balance sheet, while continuing to demonstrate our commitment to ensuring our retirees’ benefits are secure.” As a result of this transfer, AK Steel will record a non-cash pension settlement charge of $25 Million in Q4 2019.
In late October, Lennox International Inc., the Richardson, Texas based HVAC manufacturer announced that it was transferring $75 Million in pension liabilities to Pacific Life Insurance Company. In a Q3 earnings call, Lennox CFO Joseph W. Reitmeier stated that: “Similar to what we did in the second quarter, this pension settlement charge relates to an agreement we entered into with Pacific Life Insurance Company in October to annuitize $78 million of our defined benefit pension obligation. As part of this transaction, we also transferred $75 million in pension assets to Pacific Life.” This is the second pension risk transfer for Lennox. In April 2019, Lennox transferred $100 Million to Pacific Life.
Chicago based Baxter International has purchased a group annuity contract from Prudential Insurance. With this move, Baxter transferred its pension liabilities of approximately $2.4Billion, covering 17,200 former employees to Prudential. This pension de-risking transaction only affects former employees who have reached “pay status.” The transaction was expected to close on October 11, 2019.
According to a recent press release from LIMRA Secure Retirement Institute, eight out of ten defined benefit plan sponsors are “at least somewhat interested” in pension de-risking via the purchase of a group annuity contract. LIMRA reports that the first half of 2019 saw over 160 new pension risk transfer deals, totaling over $10 billion and that “recent growth in this market has predominantly been driven by small to mid-sized deals.” The sales forecast for pension risk transfers in 2019 is between $20-$25 Billion.
The class action lawsuit, Thondukolam v. Corteva, Inc., was filed in the United States District Court for the Northern District of California, case number 3:19-cv-03857-SK.
The proposed class includes more than 100,000 people, including retirees and beneficiaries in the pension plan. Edward Stone Law PC is working with Beasley Allen, Kantor & Kantor, and Sinclair Law Firm, to represent the retirees.
In 2015, the 217-year-old DuPont merged with Dow Chemical to create DowDuPont. In 2019, the new corporate entity split into three new companies Corteva, DuPont and Dow. Corteva is a combination of DuPont and Dow agriculture businesses. Through this scheme, DuPont and Dow shifted all liability for the DuPont U.S. pension, which has covered DuPont employees in America since 1904, to the newly created Corteva. The liability of the DuPont U.S. Pension plan is approximately $19 billion.
Plaintiffs argue that Corteva, which solely focuses on agriscience business, understates its liabilities including income fluctuations due to weather, global trade, and other factors beyond the company’s control. Additionally, the agriscience business involves the manufacture of chemicals already subject to large-scale litigation, the liability for which was also transferred to Corteva. Other corporate spin transactions of DuPont have also come under scrutiny. Plaintiffs also contend that under Corteva the pension plan is underfunded and uses overly optimistic estimates. Now that Corteva, Dow, and DuPont are three separate companies, Corteva can file for bankruptcy and discharge its responsibility to fund the promised pensions, leaving retirees to receive pennies on the dollar. Neither DuPont nor Dow will be affected by such a bankruptcy.
“Because of the Defendants’ actions, the plan, which was already in a downward funding spiral, is now left with an empty shell company as a plan sponsor, linked to a newly formed company that is also saddled with all of the environmental and agricultural liabilities of the historical Dow/DuPont companies. This completely separated the new, stable Dow and DuPont companies from any repercussions should the pension fail. The Defendants have attempted to avoid a legally required $6 billion funding obligation to the plan and thereby breached their fiduciary duties to the Plan as well as violated ERISA’s employee protective purpose. This lawsuit will correct this misconduct by the plan sponsors.” said W. Daniel “Dee” Miles, head of Beasley Allen’s Consumer Fraud Section.
According to a recent survey by Mercer, more defined benefit plan (DBP) sponsors seek to de-risk due to volatile markets and uncertain costs. Mercer also reported that risking Pension Benefit Guaranty (PBGC) premiums have a significant impact on funding decisions. In a June 25, 2019 press release, Matt McDaniel, head of Mercer’s US Financial Strategy Group, was quoted as saying “Given the challenges of increased market volatility and uncertain costs plan sponsors face today, many are reevaluating how they want to achieve their long-term pension plan goals. We are seeing many sponsors take a critical look at their strategic roadmap, including the supporting policy actions and governance structures that will guide them into the future. There was an acceleration of such activity in the past two years, and plan sponsors expect continued evolution in the next few years.”
This same Mercer survey found that 70% of survery respondents were likely to transfer some or all of their retirees obligations to an insurance company through the purchase of an annuity in 2019 or 2020.
Earlier this year two companies announced the purchase of group annuity contracts from Pacific Life Insurance Company for the purpose of pension de-risking. In a $370 million transaction, S&P Global transferred its obligations to 4,600 retirees to Pacific Life. Lennox International, the heating and cooling company transferred $100 million in pension obligations to Pacific Life Insurance Company. In 2016, Lennox offered lump-sum buyouts to vested participants. Few details were released about either of the Pacific Life transactions.
Dana Incorporated, the Maumee, Ohio based maker of power-conveyance and energy management solutions for vehicles and machinery has now transferred all liabilities associated with the Dana Retirement Plan, by purchasing group annuity contracts for the remaining plan participants. The company contributed approximately $62 million in cash to the Retirement Plan in order to facilitate the purchase of two group annuity contracts. One contract, purchased from Athene Annuity and Life Company (a subsidiary of Athene Holding Ltd.) will cover all but the New York retirees. New York retirees will receive their pension benefits in the form of annuity payments from Companion Life Insurance Company, a subsidiary of United of Omaha Life Insurance Company. Dana’s retirees will begin receiving payments from the two insurance companies in October, 2019.
Avery Dennison, the global manufacturer and distributor of adhesive materials, apparel branding labels, and specialty medical products headquartered in Glendale, California transferred approximately $750 million of its pension obligations to American General Life Insurance Co. in May 2019. This pension de-risking transfer affects about 8,500 retirees. In July 2018, Avery Dennison terminated its US defined benefit plan, and subsequently contributed $200 million to the plan before making lump-sum buyouts available to certain plan participants, reducing its pension liabilities by about $152 million. In March 2019, the company contributed $7 million to the DBP to cover the costs association with the pension de-risking transfer.
According to the 2019 Pension Risk Transfer Poll sponsored by MetLife, most companies plan to rid themselves of their pension liabilities in the future. Pension de-risking transfers topped $26 Billion in 2018, up 14% from 2017. Pension de-risking since 2012 exceeds $125 Billion. 2019 is on-track to be a big year for pension de-risking. According to LIMRA Secure Retirement Institute pension de-risking transfers (what they term “buy-out” sales) were $4.75 Billion in the 1st Quarter of 2019.
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© Edward S. Stone 2014-2020.
Photos courtesy of David Lasnick.