“Twice in the last twelve years the average pension plan has lost more than 30% of its funded status.”
Dylan Tyson, SVP & Head of Pension Risk Transfer, Prudential Retirement
“In 2012 of the 229 non-financial U.S. based companies with DB plans over $100m in obligations 159 were less than 80% funded whilst only 27 were funded above the 90% level”1
According to Prudential Retirement in 2012 alone over $35 billion in pension risk transactions occurred in the U.S. and in the latest Clear Path Analysis report, Scott Gaul, SVP Pension Risk Transfer, Prudential Retirement, predicts “..estimates that $60-$100B of liabilities could be transferred to a 3rd party over the next 3-5 years.”
The Pension Plan De-Risking, North America report, published in collaboration with Prudential Retirement and P-Solve Cassidy, with industry insights from the International Finance Corporation (IFC), International Monetary Fund (IMF), Royal Dutch Shell and George Washington University Endowment examines:
♦ The relationship between market volatility, risk assets and the fixed-income space: between 2009-2012 the aggregate pension funding deficit for plans increased from $392 billion to $441 billion2
♦ Transaction case studies of General Motors (with liabilities 4 to 5 times greater than market cap) and Verizon (respectively, liabilities at 25% of market cap)
♦ The “triple win” scenario
Linking member demographics and their challenges to corporate goals, actions and the economic climate is vital, as Prudential Retirement can testify, for the success of any de-risking strategy.
Peggy McDonald, Senior Vice President & Senior Actuary, Pension Risk Transfer, Prudential Retirement, “For Verizon the first goal was to reduce the pension liabilities on their books. Similar to GM, Verizon experienced significant volatility in pension economics over the past decade or so which impacted on earnings and cash flow.”
McDonald goes onto state that “The typical plan sponsor has 50% or more of their pension liability associated with the retiree population.”
“The Verizon transaction included 42,000 covered lives. On average these participants were 70-80 years old. The GM transaction included 110,000 individuals -- all retirees of the GM salaried pension plan.” And so by default “Both transactions were large enough to allow GM and Verizon to successfully move the needle in terms of their pension risk”, according to Dylan Tyson, Senior Vice President & Head of Pension Risk Transfer, Prudential Retirement.
To succeed the actuarial/ investment guide must be bridged. According to Dan Cassidy, Managing Director, P-Solve Cassidy, “A firm that can integrate actuarial, investment and pension-related enterprise risk analysis into its offering can provide sponsors with a complete picture.”
Ryan McGlothlin, Managing Director, P-Solve Cassidy, highlights that; “in early 2011 most US corporate pension funding levels moved sharply higher (by up to 10% in some case) due to the combination of rising long-term interest rates and equity markets.”
As a result McGlothlin argues “The majority of pension plans can no longer rely on long-term assumptions to bail them out: the risks and opportunities of the short term have a significant impact on the success of a pension strategy.”
Long-term strategies have altered with many plans cutting back their equity position in preparation for such de-risking strategies. Dave Schnore, Executive Director, UAPP (Universities Academic Pension Plan); plan was “running about 65- 68% equities”, but Schnore points out that “…our pension plan has a 1.1 billion dollar unfunded liability against total liability of around 4 billion and assets of 2.9 billion..”
David Wilton, Chief Investment Officer, Private Equity, International Finance Corporation, comments: “From the emerging market private equity portfolio that I personally manage we are actually diversifying as far as we can as we have a portfolio that is way off the Cambridge benchmark. By this I mean that where the benchmark is 60% Asia we are only 24-25 % Asia.”
In the fixed-income product space Rabi De, Investment Manager, Group Pensions, Royal Dutch Shell, argues that legislation, particularly Dodd Frank, means that; “as a result dealers carry much less inventory, which has drained liquidity in the fixed income instruments, which mostly trades over-the-counter (OTC).”
According to Fabio Savoldelli, Adjunct Professor- Finance & Economics, Columbia University, assets in fixed-income hedge funds have become higher than the assets in equity hedge funds, which: “...has been driven by not retail investors but institutions, and as a result we have seen $800 billion in fixed income hedge fund assets flowing in, with new investment occurring at a tremendous rate…”
1 Fitch Ratings, 25th July 2012
2 JP Morgan
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