Heard Off the Street: 'De-risking' trend grows

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About 41,000 former Verizon Communications employees are the latest group of retirees who will be getting their pension checks from an insurance company instead of their former employer.

The company announced Wednesday it is transferring about $7.5 billion of its pension obligations -- 25 percent of the pension benefits it is on the hook for -- to Prudential Insurance. Unloading those obligations will strengthen Verizon's balance sheet and free up cash the company can invest in its business instead of its employees and retirees.

The telecommunications provider joins a growing list of companies doing something benefits experts refer to as "de-risking." The trend is fueled by record-low interest rates, which make pension obligations larger than they would be in more normal economic times. General Motors announced earlier this year it is transferring $26 billion of its pension obligations to Prudential. Since then, other companies have followed suit including NCR, The New York Times, Archer-Daniels-Midland and Yum! Brands.

Other companies, including Ford Motors, are offering retirees lump-sum payments in exchange for their monthly pension checks. Doing that transfers pension risk from the company to workers or retirees, who will suffer if they cannot invest the lump sum wisely enough to finance the rest of their life.

"Companies are just tired of the risk they are exposed to," said Jonathan Berry, partner at Mercer, a benefits consulting firm. "We've got a lot of [pension plan] sponsors interested in getting risk off their books."

While retirees will get the same monthly pension check from the insurance company, a pension watchdog group says it will ask Congress to put a halt to the pensions transfers until their impact on workers and retirees can be evaluated.

"We need to stop, take a breath, and make sure that the retirement security of the people affected by these moves is fully protected," said Karen Friedman of the Pension Rights Center.

Here's how the employer-to-insurance company transfers work. Companies unloading pension obligations transfer a portion of the stocks, bonds and other securities in their pension funds to insurance companies. They also pay the insurance company a premium to assume a portion of the pension risk.

Mr. Barry said the premium is based partly on the kind of pension obligations being transferred. Companies shifting benefits being paid to current retirees pay a lower premium than companies transferring obligations to workers who have yet to retire. That's because interest rate fluctuations pose more risks to the pensions of workers who have yet to retire than they do to the pensions of current retirees, Mr. Barry said.

The insurance company invests the premium and the pension fund securities, with the investment earnings paying off the pension payments the insurer agreed to make.

Another reason companies are unloading pension obligations is because they admit they are not as proficient at investing as insurers, whose business relies on producing returns large enough to pay off claims, whether they are from automobile accidents, natural disasters or a worker retiring.

"The senior management at a company, their job is to make profits, not to run a pension plan," Mr. Barry said.

He said insurers who take on pension risks from companies also take on the costs of administering pension plans, freeing up more cash companies can invest in their business.

One Canadian pension expert thinks accepting pension risk will be a good business for insurance companies. Leo Kolivakis, who writes the Pension Pulse blog, said an improving U.S. economy and an eventual rise in interest rates will allow insurers to generate handsome returns on the pension fund securities companies are turning over to them.

"They are picking them up now at a song," Mr. Kolivakis said. "Over the long run, they will make a lot of money."

The same may not be true for retirees, particularly for workers who take lump-sum payouts.

The pension rights group worries that an insurance company could fail. Ms. Friedman said that although that has not happened often in recent years, if it does, workers and retirees could end up with reduced benefits. That's because their pensions will be backed up by state insurance guaranty funds rather than the Pension Benefit Guaranty Corp.

The federal agency insures pension benefits when companies go out of business. But when pensions are transferred to insurance companies, state insurance funds have to do the PBGC's job and there are limits on how much they pay out. Those limits range from $100,000 to $500,000, which may be less than the value of pension benefits a worker or retiree is entitled to receive. Pennsylvania guarantees up to $300,000.

Another concern is how much risk insurers are taking on. In the past, companies took about $1 billion in pension obligations off their books annually by striking deals with insurance companies. This year one insurer, Prudential, agreed to take on more than $30 billion in just two transactions.

"That definitely is part of the issue," said Pension Rights Center spokeswoman Nancy Hwa. "We're talking about so much money here"


Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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