Pension Risk Transfer – Facts from 2019

Pension risk transfer facts for 2019:

First Quarter 2019:

  • 78 “Buy-out” group annuity contracts purchased by Plan Sponsors
  • “Buy-out” purchases surpassed $4.7 Billion

Second Quarter 2019:

  • 112 “Buy-out” group annuity contracts purchased by Plan Sponsors
  • “Buy-out” purchases were $4.166 Billion
  • “Buy-in” purchases were $880 Million. This represented the 5th consecutive quarter with the sale of at least one “buy-in” contract

Third Quarter 2019:

  • 111 “Buy-out” group annuity contracts purchased by Plan Sponsors
  • “Buy-out” purchases were $7.732 Billion
  • “Buy-in” purchases were $0

Fourth Quarter 2019:

  • “Buy-out” purchases were $11.3 Billion
  • “Buy-in” purchases were $970 Million. This was a new record for the U.S. market.

Total “Buy-out” contracts for 2019: 501

Total of “Buy-out” purchases: $28 Billion

Boise Cascade Continues Pension De-Risking

Boise Cascade, the Boise, Idaho based manufacturer of building materials, has purchased its third group annuity contract from Prudential Insurance Company of America.  According to its 8-K filing, $19.8 million in pension assets were transferred to Prudential, representing approximately 10% of Boise Cascade’s projected U.S. qualified pension plan obligations. This is Boise Cascade’s third transaction with Prudential.

Rogers Corp. Terminates Pension Plan

In late October, Rogers Corp., a global materials manufacturer and one of the oldest public companies in the U.S., announced the termination of its U.S., non-union, pension plan.  Rogers transferred $163 Million in pension liabilities in a combination of lump-sum distributions and the purchase of a group annuity contract.  In its Q3 earnings call, CFO Michael Ludwig, stated that: “As highlighted in our earnings press release the company terminated a pension plan in the fourth quarter. The pension plan was adequately funded therefore the company was not required to make additional cash contributions to fund the plan. The company will however take a $52 million to $56 million non-cash charge to income for other accumulated losses for the plan that were recorded as part of our equity.”

Owens Corning Transfers $89 Million of Pension Liabilities

In October, Owens Corning, the Toledo, Ohio based manufacturer of insulation, roofing, and fiberglass composites announced the transfer of  $89 Million in pension liabilities, along with $83 Million in plan assets to an undisclosed insurance company.  According to Pension & Investments, the pension risk transfer affects retirees receiving monthly benefits of less than $600 per month.

AK Steel Announces Pension Risk Transfer

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.

Lennox International Pension De-Risking Continues

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.

Baxter International De-Risks Pensions

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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.

LIMRA Reports 8 out of 10 Plan Sponsors Want to De-Risk

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.

Class Action Filed on behalf of DuPont retirees

 

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.

Volatile Markets Influence Pension De-Risking

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.