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Pension Closeout Activity Ramping Up

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The number of American workers who enjoy the benefit of a retirement pension has been declining for decades. Some employers who used to offer pensions are offering employees 401-K plans, often with an employer match of a specified amount. Many Americans, however, have no employer retirement plan and are relying on Social Security and their (often meager) savings to support themselves in their golden years.

Pension de-risking

A growing number of businesses who do still offer employee pension plans, or who have legacy pension plans on their books, are deciding they want to offload the risk involved with the plans. This means making a deal with a life insurance company to transfer the pension obligations. In most cases, this involves transferring the current assets and paying a premium related to how much the pension plan is underfunded.

Citi’s life insurance research report

Citi Research released a report yesterday highlighting the fact that pension risk transfer activity has been picking up over the last couple of quarters. According to author Erik J. Bass, this trend is just gathering steam and likely to continue for several years. “We believe life insurers are well-positioned to take advantage of the secular trend of pension de-risking and project the U.S. pension closeout market to exceed $100Bover the next 5 years. There have been several large closeout transactions over the past month, supporting our view that activity will accelerate as plan funded status improves.”

Increasing pension closeout activity

The report also highlighted the increasing number of pension closeout deals. Just today, Akzo Nobel N.V. (AMS:AKZA) announced plans to transfer $655 million in pension assets to Metlife Inc (NYSE:MET). Earlier this fall, SPX Corporation (NYSE:SPW). transferred around $625M in pension obligations to Mass Mutual, and NCR Corporation (NYSE:NCR) formulated a buyout contract with Pension Insurance Corp. to transfer more than $1B in obligations.

US Pension

When you add these recent transactions to earlier 2013 pension closeout activity, it looks like 2013 will be the second most active year for global pension closeouts since 2005 (after 2012, which saw a couple of unusually large deals).

Closeouts profitable for life insurers

Bass also points out that these pension buyout deals are typically quite profitable for insurers, and the large number of deals being done makes both Prudential Financial Inc (NYSE:PRU) and Metlife Inc (NYSE:MET) attractive investments. “We expect insurers to earn healthy returns(12-14%) on closeout deals as there is limited competition and market capacity, particularly for large plans (>$1B). In addition, we view longevity risk as a natural offset to mortality risk and believe PRT transactions are an efficient use of capital.”

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