Recent US pension close out transactions

RECENT US PENSION
CLOSE-OUT TRANSACTIONS
JUNE 21, 2013
Scott Campion
FINANCIAL SERVICES
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Agenda
• GM and Verizon pension close-out deals
• How corporations think about pension close-out and de-risking
• Differences between US and Canadian markets
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The GM and Verizon deals were broadly similar non-union retiree buy-outs,
with aspects that are likely to become standard for future deals
• In each transaction, the plan sponsor is completely settling a portion of their plan liability
• Responsibility for the pension payments is transferred to an insurer
GM and Verizon annuitization parameters
GM
Verizon
Size
$20 BN+ (~19% of liability)
$7.5 BN (~25% of liability)
Covered participants
All non-union retirees
Portion of non-union retirees
Lump sums
Offered to recent retirees (~40%)
Not offered
Account type
Separate account
Separate account
Termination structure
Spin-off termination and buy-out
Non-termination buy-out
In-kind asset transfer
Mix of fixed income and PE
Mix of fixed income and PE
Independent fiduciary engaged
Yes
Yes
Wining bidder
Prudential
Prudential
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Larger deals can be significantly more complicated than
traditional transactions
• The regulatory process can take months from announcement to wind-up
Transaction timing
and lock-in
• For large transactions, the uncertainty around capacity and pricing at the end
of this process is often unacceptable
• Structures are required to lock-in capacity and pricing
• For large transactions, cash transfers can be more expensive, as insurers are
exposed to spread risk while they deploy cash (which can take months)
In-kind asset transfer
Contract structure
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• In-kind asset transfer can reduce costs if the plan holds appropriate assets, but
adds significant deal complexity
• Large plan sponsors (and sponsors of healthy plans) tend to be interested in
pursuing security-enhancing structures such as separate accounts or multiinsurer solutions
4
A variety of stakeholders and advisors may have roles in a complex pension
closeout process
Corporate-side
Insurer-side
Plan sponsor
Insurer
ERISA counsel
Advisor (consultant and/or bank)
Insurance counsel
Insurance counsel
Asset transfer expert
Asset transfer expert
Actuary
Independent fiduciary
Advisor
ERISA counsel
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In formulating their pension strategies, corporates look to piece together
multiple considerations
Earnings
Cash
• Loss of ROA on
• Volatility
pension assets
(and timing) of
can lead to a onefuture cash
time earnings hit – contribution vs.
compared to a
any initial
reduction in future
cash injection
earnings volatility
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Investor
perception on
risk taking
Pure financial
theory
Human
Resources
• Do shareholders • Pension funding • Managing labor
reward corporates
obligations can be
relations and
for taking
viewed as senior
communication
certain risks?
debt, altering a
company’s
• Can the corporate
capital structure
express those
same views
elsewhere on the
balance sheet?
6
GM highlighted the move as a strategic shift to reduce risk, increase
flexibility, and focus on the core business
“This is about a fundamental risk reduction to the enterprise, about lowering our cost
of capital, about increasing our financial flexibility, and ultimately driving long term
shareholder value.”
“When you’re in the pension business in a big way, you’re subject to enormous
volatility, from a number of uncontrollable factors, that tends to force calls on cash at
inopportune times.”
“Our core business is designing, building, and selling cars…This is really a move for
us to further refocus on our core business, and get out of a non-core business.”
– Dan Ammann, CFO, General Motors, June 2012
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The Canadian and US markets have important differences, but the idea that
large closeouts are not possible in Canada is a myth
Differences in pension landscape
Differences in insurer landscape
• Canadian plans are required to fund to
the wind-up basis, a higher funding
standard than in the US
• There are fewer large insurers who have
capacity to take on very large deals
• Canadian plans are more commonly
indexed to inflation
• The insurance regulatory landscape is
different, affecting structural
security options
• The market for Canadian corporate
bonds is much smaller, constraining derisking options
• Lump sums for retirees do not appear
possible in Canada
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