Prudential Snags Its Second Big One: Verizon

Following General Motors’ record-setting pension-risk transfer, Verizon has executed a $7.5 billion deal with Prudential.

(October 17, 2012) – They’re celebrating in the Prudential offices. 

Fresh off a record-breaking deal with General Motors, the Newark-based firm has once again made waves with an expected $7.5 billion pension-risk transfer deal with the Verizon Management Pension Plan

“Upon closing, which is subject to certain conditions and expected by December 2012, the Verizon Management Pension Plan will purchase a group annuity contract from The Prudential Insurance Company of America,” the firm said in a release. “Prudential will then assume responsibility for making payments to the approximately 41,000 retirees covered by the agreement.” 

Prudential made news earlier this year when General Motors decided to offload $26 billion in pension liabilities to the insurer. The deal, to be finalized after a retiree election period ending in November, was the subject of aiCIO’s cover story in September, titled “This Changes Everything.” 

“Plan sponsors have always moved in herds, and the herd has begun to stir,” author Benjamin Ruffel wrote at the time. “There is [a] reason that GM will be emulated, and in short order—capacity. There are only two insurers who undoubtedly possess the heft along with the intellectual and administrative horsepower to take on mammoth pension risk transfer deals: MetLife and Prudential. There are other players in the market, including MassMutual, Principal, American General, and Mutual of Omaha, to name a few, but the low interest rate environment has been as deleterious for insurers as it has been for pension plans, and the recent drought in pension buy-outs has forced some insurance companies out of the business entirely. Prudential has said it views pension risk transfer as a strategic priority and that it will deploy excess capital generated by its operating businesses to fund its pension termination efforts, but even a sanguine analysis suggests that between MetLife and Prudential there is perhaps the capacity to absorb only $100 billion of liabilities.” 

“It is now accepted wisdom that where (GM CFO Dan) Ammann went, a line of corporate CFOs are poised to follow,” Ruffel concluded. “Verizon, Ford, and United Technologies are all known to be analyzing the path to full or partial termination. They are far from alone.” However, various industry insiders have questioned the prudence of offloading liabilities when interest rates are at historic lows. By some calculations, a 1% rise in interest rates would mean that a pension plan with an average duration of 10 years would have ‘overpaid’ by 10% at current interest-rate levels.

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