On October 17, 2012 Verizon announced a multi-billion dollar annuity purchase to settle pension liabilities for management retirees and beneficiaries. The transaction, expected to close in December of 2012, involves the purchase of a group annuity contract from Prudential Insurance Company of America (Prudential) to cover approximately 41,000 retirees and beneficiaries. The Projected Benefit Obligation (PBO) currently carried on Verizon’s balance sheet for these obligations is $7.5 billion.
The action taken by Verizon adds to the growing trend of pension transfer and settlement actions among major employers. Other announcements of significant actions include those made by Ford Motor Company (Ford) and General Motors (GM) earlier this year. The Verizon transaction is expected to be the second largest insured annuity settlement in U.S. history, trailing only the GM deal. Aon Hewitt was the lead strategy partner to Verizon in this transaction.
"The size of the pension settlement actions announced in 2012 is redefining the market," noted Ari Jacobs, senior partner and Global Retirement Solutions Leader at Aon Hewitt. "In the U.S., the entire volume of pension liabilities annuitized in recent years has been about $1 billion per year and no single transaction has exceeded $1 billion since the 1980s. The transactions by Verizon and GM are orders of magnitude larger than this and likely to be important in the continuing trend in pension de-risking and settlement strategies. Companies considering this strategy need to understand that each situation requires a unique approach to achieve their goals."
-Over the next year, Aon Hewitt expects additional companies to take significant steps to reduce the size of their pension liabilities and manage the risk in their plans. According to Aon Hewitt’s 2012 Hot Topics in Retirement survey of more than 500 employers, there is increased interest in de-risking and pension settlement activities. As an example, 35 percent of companies were very or somewhat likely to offer lump sums to deferred vesteds in 2012.
-We believe the pension settlement environment will remain very active, particularly as plan sponsors continue to react to the significant legislative changes under the Pension Protection Act and other recent pension legislation changes,” noted Jacobs. ”As companies contemplate these large settlements, they need to consider many important and complex issues, including plan finances, compliance, administration and communication with individual participants.”
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