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Demand soaring for pension transfers to insurers
Old 06-11-2012, 09:30 AM   #1
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Demand soaring for pension transfers to insurers

Here's a new (to me) twist on the pension funding issue:

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A Reuters analysis of the pension obligations of the S&P 500 found that almost half of the companies with underfunded pensions have enough cash to spare to do a risk-transfer deal, including Rupert Murdoch's News Corp and agriculture giant Archer Daniels Midland Co, suggesting there could be a scramble ahead for that limited capacity.

Known as pension terminal funding, the concept is simple: an employer pays an upfront premium to an insurance company for an annuity that covers all the members of a pension plan.

The insurer becomes responsible, via the annuity, for all of the retirees' pensions and the sponsor gets to wash its hands of the obligation.
Insight: Demand soaring for pension transfers to insurers - Yahoo! News
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Old 06-11-2012, 10:38 AM   #2
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Sounds to me like a good way for companies to wiggle out from under the responsibility and/or hassle of fulfilling their pension promises.

And if the insurance company defaults, "Too bad! But not our problem. Guess the State Guaranty Association compensation for annuities up to $100K (or $200K or whatever) will be all you get."
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Old 06-11-2012, 10:51 AM   #3
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It seems to me that if the insurance companies think that it is a good deal; that is, good enough to buy from MegaCorp, I am surprised that MegaCorps wouldn't self insure and make the commission. I guess that at the right number, it's worth it to lay it off.
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Old 06-11-2012, 11:07 AM   #4
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Sounds to me like a good way for companies to wiggle out from under the responsibility and/or hassle of fulfilling their pension promises.

And if the insurance company defaults, "Too bad! But not our problem. Guess the State Guaranty Association compensation for annuities up to $100K (or $200K or whatever) will be all you get."
Heh! I was just thinking about how this could be gamed. "We've transferred your pensions to Bob's Universal Assurance and Pancake House, which for a few minutes yesterday was a wholly owned subsidiary of GigaCorp. Oh, and in unrelated news, GigaCorp announces that we've just spun off Bobs Universal Assurance and Pancake House, which now holds all of our former corporate debt, and is fully staffed by the bottom tranch of the Finance department as determined in the last review cycle."

(based on my experience of seeing spinoffs done to dump debt, and one spinoff done to dodge the 60 day notice on large layoffs, neither of which were the reasons in the press releases.)
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Old 06-11-2012, 11:11 AM   #5
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It seems to me that if the insurance companies think that it is a good deal; that is, good enough to buy from MegaCorp, I am surprised that MegaCorps wouldn't self insure and make the commission. I guess that at the right number, it's worth it to lay it off.
Gets it off the books, may improve credit ratings and bond rates, etc., etc.

Ha
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Old 06-11-2012, 11:12 AM   #6
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Heh! I was just thinking about how this could be gamed. "We've transferred your pensions to Bob's Universal Assurance and Pancake House, which for a few minutes yesterday was a wholly owned subsidiary of GigaCorp. Oh, and in unrelated news, GigaCorp announces that we've just spun off Bobs Universal Assurance and Pancake House, which now holds all of our former corporate debt, and is fully staffed by the bottom tranch of the Finance department as determined in the last review cycle."

(based on my experience of seeing spinoffs done to dump debt, and one spinoff done to dodge the 60 day notice on large layoffs, neither of which were the reasons in the press releases.)
That's exactly what I was thinking too, but didn't know how to articulate. Thanks! The whole thing sounds like a huge scam.

Also, not being much of an expert on this I just found out that the State Guaranty Association isn't a governmental entity. So, I suppose it might be possible for it to go belly up too if too many pension annuities collapsed. At any rate, the limitations on the amounts they guarantee might be a thorny problem for the retiree stuck in the middle.
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Old 06-11-2012, 11:39 AM   #7
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That's exactly what I was thinking too, but didn't know how to articulate. Thanks! The whole thing sounds like a huge scam.

Also, not being much of an expert on this I just found out that the State Guaranty Association isn't a governmental entity. So, I suppose it might be possible for it to go belly up too if too many pension annuities collapsed. At any rate, the limitations on the amounts they guarantee might be a thorny problem for the retiree stuck in the middle.
So, I suppose it might be possible for it to go belly up too if too many pension annuities collapsed. At any rate, the limitations on the amounts they guarantee might be a thorny problem for the retiree stuck in the middle hole. FIFY

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Old 06-11-2012, 11:42 AM   #8
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And then there are probably those who will make financial bets that the annuities will fail ala credit default swaps
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Old 06-11-2012, 12:05 PM   #9
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I guess that's the problem with pensions that weigh on my mind, though government pensions are a slightly different animal. Someone else is in control of my money (yes, my money as I contributed a butt-load to my own pension). If they screw it up, sell it off to balance the books or go out of business, the pensioners are screwed.

On the other hand, if you control your own retirement fund, you can screw it up too so...
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Old 06-11-2012, 12:05 PM   #10
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Also, not being much of an expert on this I just found out that the State Guaranty Association isn't a governmental entity. So, I suppose it might be possible for it to go belly up too if too many pension annuities collapsed. At any rate, the limitations on the amounts they guarantee might be a thorny problem for the retiree stuck in the middle.
I'm not sure how or if the State Guaranty Association "guarantee" would apply. In Texas it is "guaranteed" by the companies selling equivalent types of policies in the state. There is no "full faith and credit" clause that obligates Texas to pay a penny.

If a company with a SPIA portfolio fails, the association assesses the other insurance companies selling SPIAs in Texas. If a company fails to pay their assessment, they are excluded from selling in the Texas market for X years.

These pensions look a lot like a SPIA but I'm not sure if that is officially how they are treated.
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Old 06-11-2012, 12:19 PM   #11
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I guess that's the problem with pensions that weigh on my mind, though government pensions are a slightly different animal. Someone else is in control of my money (yes, my money as I contributed a butt-load to my own pension). If they screw it up, sell it off to balance the books or go out of business, the pensioners are screwed.

On the other hand, if you control your own retirement fund, you can screw it up too so...
(emphasis mine) Aha! Good point and one that is often neglected in articles and discussions. None of us THINK we will screw up our investments, but I suspect a significant number do anyway.

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I'm not sure how or if the State Guaranty Association "guarantee" would apply. In Texas it is "guaranteed" by the companies selling equivalent types of policies in the state. There is no "full faith and credit" clause that obligates Texas to pay a penny.

If a company with a SPIA portfolio fails, the association assesses the other insurance companies selling SPIAs in Texas. If a company fails to pay their assessment, they are excluded from selling in the Texas market for X years.

These pensions look a lot like a SPIA but I'm not sure if that is officially how they are treated.
Thanks. That greatly clarifies to me what the State Guaranty Association really is, and what their role is in case the company holding the SPIA goes under.
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Old 06-11-2012, 12:35 PM   #12
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My understanding is that the PBGC is similar to the state associations, most of its money comes from assessments against existing pension funds. The Federal government might choose to prop up the PBGC, but I don't think they are required to do so. Even if they are required, that can be eliminated by the stroke of a pen.
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Old 06-11-2012, 12:45 PM   #13
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Old 06-11-2012, 12:47 PM   #14
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It seems to me that there is nothing necessarily sinister about this, and a pensioner isn't really facing a greater risk when the liability is transferred to an insurance company. I see S&P companies more capable of weaseling their way out of an obligation compared with insurance companies, which are subject to more regulation.

A pension becoming an annuity is still preferable to an individual lump sum, where each person's risk of running out of money is much higher.
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Old 06-11-2012, 12:51 PM   #15
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A pension becoming an annuity is still preferable to an individual lump sum, where each person's risk of running out of money is much higher.

I respectfully disagree, and I'll take my chances and bear the responsibility accordingly as I truly have a vested interest in not running out of money.
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Old 06-11-2012, 12:54 PM   #16
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Known as pension terminal funding, the concept is simple: an employer pays an upfront premium to an insurance company for an annuity that covers all the members of a pension plan.

The insurer becomes responsible, via the annuity, for all of the retirees' pensions and the sponsor gets to wash its hands of the obligation.
I'm repeating myself, but that's exactly what the Fortune 500 company I used to work for offered me when I retired (I had a small pension that was frozen in 1994). The lump sum they offered was within 1% of the annuity quotes I got for the same monthly income & survivor benefits. The Megacorp admin openly admitted they'd buy an annuity on my behalf if I chose the pension option, so their liability ended when I retired no matter what option I chose. I've wondered how common the practice was ever since and haven't seen anything in my searches.

I took the lump sum, a no-brainer IMO (given relatively low annuity yields at present), also repeating myself (for purposes of this thread).

But I also didn't see it as a negative in my case. Even though they've been around since 1938, I'm honestly not convinced my former Megacorp will live as long as I will. I might give an insurance company better odds...
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Old 06-11-2012, 12:54 PM   #17
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I guess that's the problem with pensions that weigh on my mind, though government pensions are a slightly different animal. Someone else is in control of my money (yes, my money as I contributed a butt-load to my own pension). If they screw it up, sell it off to balance the books or go out of business, the pensioners are screwed.
On the other hand, if you control your own retirement fund, you can screw it up too so...
Let's see if I have this right: the auto companies are expecting to add a sheen of credibility to their pension plans by buying annuities from insurance companies?

I can see a lot of lump-sum disbursements being chosen by future retirees... I'd be confident that I could screw it up at least as well as either of the above entities.
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Old 06-11-2012, 12:57 PM   #18
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Not to blow sunshine here, but there are cases where it may be GOOD for your employer to spin-off your pension to a 3rd party.

An 'on the books' pension fund can be raided/adjusted/shut down during merger, or in the case of a corporate bankruptcy- liquidated. Just ask anyone who flies for United.
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Old 06-11-2012, 01:50 PM   #19
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Conventional wisdom, at least here on the forum is that now is a bad time to buy annuities. Mega corporations are now buying annuities in record numbers. So, who is getting the bad deal, mega corp or the employees?

There is no such thing as a stupid question but I think I just came mighty darned close.
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Old 06-11-2012, 01:52 PM   #20
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Not to blow sunshine here, but there are cases where it may be GOOD for your employer to spin-off your pension to a 3rd party.

An 'on the books' pension fund can be raided/adjusted/shut down during merger, or in the case of a corporate bankruptcy- liquidated. Just ask anyone who flies for United.
+1

I would much rather have an annuity obligation from a regulated insurer that has to comply with state laws and regulations on the assets they can invest in and the surplus they need to maintain and is overseen by those regulators the rating agencies and is backstopped by state guaranty funds (warts and all) than a promise from some megacorp pension plan that is likely underfunded and can be raided. Easy decision.
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