International Paper, Prudential Make $1.6 Billion Group Annuity Deal

Prudential will take over the benefit obligations of 23,000 retirees.

International Paper has purchased a $1.6 billion group annuity contract from the Prudential Insurance Company of America, which will shift the benefit obligations of 23,000 retirees to the insurer.

The deal is not only the second pension risk transfer between the two in nearly a year, but the second-largest agreement in 2018, behind FedEx’s mammoth $6 billion pact with MetLife in May.

International Paper’s previous $1.3 billion buyout with Prudential was last October, where the insurer took on the benefits of 45,000 International Paper beneficiaries. It was the first pension risk transfer between the two organizations.

Group annuity buyouts have become increasingly more popular across the corporate pension landscape as chief investment officers seek ways to de-risk their plans and boost funding ratios. A risk transfer helps shield the fund from volatility and lengthier payments as life expectancy grows.

The paper company has been de-risking since 2014, when it announced plans to freeze its benefit accruals at the end of this year. In 2016, it offered a lump-sum payment to 47,000 former employees that had not yet retired, which chalked up to roughly $3 billion in liabilities. Only $1.2 billion, or less than half of that total, was taken by about 25,000 ex-workers.

In addition to the Prudential deal, International Paper also issued a $1 billion debt offering last fall, which helped pay for a $1.25 billion pension contribution. This also cut the expectations to make any required contributions through 2022.

Scott Kaplan, Prudential’s head of pension risk transfers, told CIO that the business was “thrilled to have a client who places their confidence and trust in our abilities to execute a second time.” He said the deal came about at some point within the first six months of this year, and that the paper firm may have gone again with Prudential “given the success of the first transaction.”

“Like many plan sponsors, [International Paper] continued to stay on a path of de-risking and not effectively placing bets on interest rates or what I’ll call ‘taking risk in non-core parts of the operation,’” Kaplan said.

He expects there to be more pension risk transfers in 2019, as CIOs are preparing for a possible downturn in the near future. Prudential has worked on at least 13 of these deals this year, about the same as in 2017. He said the business is expecting to complete another “five or six” by the end of the year.

Robert Hunkeler, International Paper’s chief investment officer, agrees with Kaplan as far as pension risk transfer activity among his fellow corporate pensions goes. “You certainly would think so, as the increasing costs of keeping these plans in place, particularly with the high PBGC premiums companies now have to pay, and the fact that plans are getting better funded than they were before makes the environment pretty good for these types of deals,” he told CIO.

There have been no discussions about International Paper conducting any pension risk transfers in 2019, but another one would not surprise Hunkeler.

“If you’d asked me last year, I probably would’ve said ‘I thought we were done last year,’ [but] we decided to do another one this year,” he said. “The economics spoke to us, so we proceeded. I think it’s really going to be a question of what the situation on the ground looks like [regarding] whether we do another one in the future or not, but right now, it’s impossible to say.”

International Paper has $33.9 billion in total assets, according to its latest annual report. Its pension plan is 88.2% funded.

“If you add the two transactions now that we did with Prudential, plus we did a lump-sum term-vested payoff program a few years ago, if you take those in combination, we’ve done   more than $4 billion worth of risk transfer activity in the last three years,” Hunkeler said. “We’ve been pretty active, and we’re pretty pleased with it.”

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