(August 6, 2012) — Moody’s Investors Service has indentified five companies with pension obligations in excess of $20 billion that it thinks will pursue group annuitizations.
In a report, the ratings agency named Ford, Lockheed Martin, Northrop Grumman, Boeing, and Raytheon as plan sponsors that are likely to fully or partially terminate their pension obligations through a bulk annuity transaction, in which a plan sponsor offloads its pension liabilities onto an insurer. Moody’s said that all five have moved toward completely funding their plans and have outsized pension obligations relative to their market capitalizations, making them ideal candidates for annuitization.
“The large size of GM’s pension obligations relative to its market capitalization appears to have been a major driver behind its decision to partially de-risk its plan,” the report said, in reference to General Motor’s landmark decision, announced on June 1, to purchase a group annuity from Prudential for $29 billion. “Large plans can materially expose a company’s balance sheet and cash flows to movements in interest rates and capital markets. Even fully funded pension plans or plans that have been closed to new entrants or frozen are at the mercy of interest rates and market movements. As a result, plan termination can be extremely enticing for the most exposed companies.”
Moody’s stressed that group annuitization is an expensive undertaking, and that from a ratings point of view they were credit neutral events: “While our response will depend on the specifics of each transaction, we expect that the costs and liquidity reductions or increase in leverage involved in executing the transactions will likely balance out the benefits.” The report explained that, given the cost, only plans that are well funded will look into annuitization. The five companies with pension obligations over $20 billion that Moody’s predicted would follow GM and purchase group annuities have all taken steps to fully fund their plans through the implementation of liability-driven investing, making discretionary contributions, and freezing plans to new entrants.
The report also commented on the effect of future group annuity purchases on the insurance industry. While only Prudential and MetLife are large enough to participate in “mega-deals,” Moody’s contended that opportunity exists for other players: “Overall, we believe there is ample insurer capacity to absorb the market demand for annuities. If insurers remained disciplined on pricing, this could be a good opportunity to supplement growth in a mature US life insurance market.”