Demand soaring for pension transfers to insurers

[REWahoo]

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

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

 

[W2R]

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."

 

[Richard4444]

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.

 

[M Paquette]

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.)

 

[haha]

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

 

[W2R]

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.

 

[omni550]

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

omni

 

[eytonxav]

And then there are probably those who will make financial bets that the annuities will fail ala credit default swaps

 

[flyfishnevada]

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...

 

[2B]

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.

 

[W2R]

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.

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.

 

[Gearhead Jim]

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.

 

[Notmuchlonger]

Nothing bad could possibly come from this.


I'm going to go feed the unicorn now.

 

[MichaelB]

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.

 

[frayne]

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.

 

[Midpack]

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...

 

[Nords]

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.

 

[ejw93]

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.

 

[jclarksnakes]

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.

 

[pb4uski]

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.

 

[samclem]

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.

If these are truly annuities, then I think you are probably right. But much depends on whether the companies are actually doing their weaseling right now by this action. If the stated benefits to be paid match the level and security of what was promised under the Megacorp, that's good for the retirees. If there are more "depending on investment performance, prevailing interest rates, payout experience and longevity of the retiree pool" small print, then it might not be so good.
But, you can't get blood from a stone, and if the promises are too big I suppose it's better to bankrupt an insurance company than bankrupt a manufacturer.

 

[2B]

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.

<Insert snarky comment about stupid question here>

These pension obligations are typically for fixed dollar amounts. I have two very small pensions that are annuities. The companies paid the insurance company something but I have no idea what. I have an annuity stream available when I turn 65. I also have the ability to start them early (up to 10 years) with a discount factor applied. One is 3%/yr and the other one is 6%/yr.

 

[M Paquette]

Heh. Another out... The company could buy a non-guaranteed annuity from an insurer!

http://www.nolhga.com/policyholderinfo/main.cfm/location/questions

Are all types of insurance policies and annuities covered?
Generally, direct individual or direct group life and health insurance policies as well as individual annuity contracts issued by the guaranty association’s member insurers are covered by the association. Guaranty association coverage does not extend to any non-guaranteed policy or annuity, or portion thereof, or any portion of a policy in which investment risk is borne by the individual.
The guaranty association laws of each state spell out what types of policies are protected by the associations. Most states do not provide guaranty association coverage for non-indemnity health plans, such as HMOs. Unallocated annuity contracts (e.g., contracts purchased by retirement plans as a funding vehicle for participants) are protected by guaranty associations in some states. When covered, the limit is usually $5 million for all unallocated group annuity contracts issued to the contract holder, regardless of how many employees are covered.

It’s best to contact your state’s guaranty association with any questions about coverage.

Wheee! "Unallocated annuity contracts (e.g., contracts purchased by retirement plans as a funding vehicle for participants) are protected by guaranty associations in some states. When covered, the limit is usually $5 million for all..."

 

[2B]

Heh. Another out... The company could buy a non-guaranteed annuity from an insurer!

nolhga.com :: Policyholder Information



Wheee! "Unallocated annuity contracts (e.g., contracts purchased by retirement plans as a funding vehicle for participants) are protected by guaranty associations in some states. When covered, the limit is usually $5 million for all..."

Thanks. I am of the belief that people put too much faith in state guarantee associations although no covered policies have not been made whole (so far). I shudder to think what could have happened if AIG had truly failed and the CDOs went bad. I'm pretty sure lots of insurance companies were using these to hedge their portfolios.

 

[Htown Harry]

Here's a link to the GM announcement that is the lead in the OP's story link:

GM Announces U.S. Salaried Pension Plan Actions

Eligibility - Actions/Options

Retired from GM on or after Oct. 1, 1997 and before Dec. 1, 2011.

Three choices:

• One-time, single lump-sum payment.
• Continue with current monthly benefit, payable by Prudential.
• New form of monthly benefit (based on marital status) – single life annuity or joint and survivor monthly benefit, payable by Prudential.

Retired from GM before Oct. 1, 1997.

Continue with current monthly benefit, payable by Prudential.

Most active salaried employees and retirees who started receiving their pension benefits
on or after Dec. 1, 2011.

Moved into new GM pension plan with same benefits. Lump-sum payment or monthly pension benefit available at retirement, payable by GM.

I wonder how the adverse selection factor is figured into the pro-forma for a one-time, all-at-once offer of lump sum payments to a retiree pool. If I'm a retiree in declining health with heirs, I'm jumping all over the lump sum offer.

Perhaps that's why they "bracketed' the offer to include only relatively recent retirees? Still, there's bound to be some pretty sick 70-80 year-old retirees who retired in the last 15 years.