Moody’s: Expect Pension Risk Transfer Surge to Beat New Mortality Tables

The arrival of new actuarial measures could kick-start US corporate pension de-risking.

A surge of pension de-risking is expected before the end of the year, as US corporate sponsors aim to beat new mortality tables that could push total liabilities up by $100 billion, rating agency Moody’s has said. 

In a note about a bulk annuity deal that saw Motorola offload $3 billion in assets and liabilities last week, Moody’s considered the extra expense the company would have faced if they had waited another three months.

“Had Motorola waited until 2015, the changes in mortality assumptions would have required the company to offer larger lump sums to retirees,” the note said.

Current financial reporting and funding rules use mortality assumptions that are more than 14 years old. The Society of Actuaries undertook a four-year project to update these tables and intend to publish an updated set on October 31.

“Most actuaries expect these new tables to add between 3% and 8% to pension benefit obligation (PBO), with some actuaries even predicting increases up to 10%,” Moody’s said. “From a financial reporting perspective, companies will likely be required to use the new tables when calculating pension obligations for the fiscal years ending after 31 October.”

At the end of 2013, Moody’s entire rated universe of non-financial corporate issuers had a combined PBO of $1.8 trillion. Applying a 5.5% increase—the midpoint of the 3%-8% consensus estimated increase— would increase PBO by approximately $100 billion.

Moody’s warned that the increase was “not just a theoretical accounting change that does not affect economics”. Rather it warned that companies would be required to pay down this $100 billion increase over seven years, which would result in “a credit negative”.  

“Given this impending large increase to PBOs and cash drains, we expect more Motorola-like announcements in the coming months,” Moody’s concluded.

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